Cdn principal residence at departure&Treaty step up in b

[crossbordernut]

Nelsona, here are some questions I have on the options available (both from Cdn ITA & US IRC domestic points of view and from Treaty point of view) to a departing non-U.S. person (i.e. non-U.S. citizen and non-green card holder) with respect to their Cdn principal residence at the time of Canadian exit. Sorry in advance for the length:

BACKGROUND ASSUMPTION:
--Being Cdn real estate, the home is not subject to departure tax (deemed disposition) so if property is not rented out and just stays vacant, there is no change of use, hence no deemed disposition, and tax would only be due upon eventual disposition--sale or death. The PRE would only shield the pre-departure period of the gain during the yrs when individual was a Cdn resident (+1 as per the formula).

Question 1:
45(2) election could only be used if property were rented out, correct? If I'm correct, this election would add 4 additional years max of PRE if and only if individual remained Cdn resident. I'm assuming if someone terminates Cdn residency by filing exit return, then they won't get any more PRE shielding post-departure, BUT it would enable deferring the deemed disposition that would otherwise apply on change of use from rental correct?

Question 2:
Forget rental, let's assume property is not rented.
In 10th ed of Keats' Border Guide (p.229), he writes:

"Upon your exit from Canada, you must either elect a deemed disposition of your principal residence on your exit tax return, or convert it to rental property."

That doesn't strike me as correct, since we said above in the bkgrnd assumptions that there is no forced deemed disposition (no dep tax) on Cdn real estate when the property stays vacant, so I would think that's a false choice, i.e. there is no forced deemed disposition. Thoughts?

Question 3:
Keats also talks about the step-up in basis on the principal residence available to non-U.S. person departing Canadians because of the Treaty election:

"(The) Treaty helps you avoid this problem by making it appear, for tax purposes, that you purchased the Canadian home at its FMV the day you entered the US, provided you file the appropriate Treaty election with your US tax return for that tax year ... Note that this step-up in basis for your principal residence applies only to non-US citizens or non-green card holders..."

a) Unless I'm missing something, the Treaty bump-up election under Article XIII(7) is only applicable to capital property on which there was an actual deemed disposition in one country, i.e. on assets subject to Cdn departure tax. Because we said above that there is no deemed disposition on principal residence, how is this bump-up Treaty election relevant here?

b) It seems to me that the bump-up in basis comes from the preceding Treaty Article XIII(6) which gives non-U.S. citizens (and I suppose non-green card holders by extension) an adjusted basis equal to FMV at U.S. entry. My question here is Keats talks about an election, but this would seem to apply automatically, i.e. an election doesn't seem to be necessary. Thoughts?

c) If the bump-up on principal residence does come from the Treaty, then I'd assume in a non-treaty-recognizing state like California, there is no bump up to FMV given and upon eventual disposition California will tax the full amount of the gain (subject to federal U.S. principal residence exclusion rules) including the pre-US entry portion?

Question 4:
Switching gears to RRSPs for one second (you'll see the connection in a moment)--from a domestic US IRC perspective, am I correct that the bump-up in basis given to non-US person RRSP holders to FMV at time of entry for future US taxation comes from Rev Proc 89-45? (I know that 89-45 was superseded by Rev Proc 2002-23 and then 2014-55, but these latter two chiefly addressed ongoing tax deferral of RRSPs; it seems that the original bump-up in basis was only addressed in the original 89-45 RP and never repeated in the latter two, so it's interesting to think that 89-45 became obsolete when 2002-23 superseded it but only in that original RP does the bump-up language seem to apply.) Do you agree?

Finally, connection on RRSP bump-up back to principal residence bump-up--because RRSP bump-up comes from 89-45 for US domestic purposes if I'm correct above, does that mean that principal residence bump-up is only from the Treaty while RRSP bump is from IRS domestic rules?

Thanks for your clarification on all the above nelsona.
It really helps me work through these issues in my head, your insight is valuable and much appreciated.

[nelsona]

First off, forget change of use, it doesn't apply to emigrants/non-residents.with respect to their (former) home.

1. Doesn't apply. All you need is a good FMV estimate for the day you leave. You will only be taxed when you sell (or die), based on the PR+1 rule.
2. Keats is wrong on this. See 1.
3. No point once again. See 1. Non-US citizens get the bump-up for their residence.
4. the bump-up only occurs if you actually swap your investmebrts. No auto-bump-up occurs.

Your last statement is correct.

Shortne you quation next time please. I almost didn't answer.

[crossbordernut]

Thank you very much for reply. Will try to be briefer next time.