This post is about the Lifetime Capital Gains Exemption in the year of departure from Canada. If you have private shares on departure they are deemed to be disposed, but you can use the exemption to eliminate some or all of the tax on the Canadian side. If you sold these shares in normal circumstances while resident of Canada for the entire year, there is typically no downside of using the exemption to eliminate the tax on the gains.
However, I’ve read previous posts on this forum indicating that there may be some downsides associated with using this exemption in the year of departure. I think it was JGCA that pointed out that the tax is potentially decreased or eliminated on the Canadian side, but the US does not recognize the exemption and does not give you a bump in the ACB on the shares. In other words, when you ultimately sell the shares, you will pay tax to the US based on the ACB, not the fair market value at the time of departure. In other words, the exemption is essentially wasted because even know you eliminate the tax on the Canadian side, you will have to pay tax on the shares on the US side when you ultimately sell them. Furthermore, even if you didn’t use the exemption on departure and paid the tax in Canada, you would have a FTC mismatch on the US side unless you sell them in the same year as you depart Canada.
JGCA also went on to explain that by using the election on your departure return you may eliminate the gain on the Canadian side, but could also create a large amount of Alt Min Tax (depending on the circumstances); which you will likely not be able to recover over the next 7 years like you normally would if you were a resident of Canada (because you likely won’t have any Canadian source income after your departure).
After taking these negative consequences into consideration, does it still make sense to claim the exemption on the Canadian side? I suppose if you are never coming back to Canada and the Alt Min Tax that you create by using the exemption is zero or less than the tax on the gain, you should use it? Canadian tax rates are generally higher than US rates, so there would be a small savings using the exemption on the Canadian side (to eliminate the additional tax on the tax rate differential) and it would also create a tax deferral because you wouldn’t have to pay the tax to the US until the shares are eventually sold. However, I suppose if the Alt Min Tax is about the same as the tax on the gain and you plan on coming back to Canada at some point, you may want to preserve your exemption for future use? Anyone have any thoughts on this?
Is there not a treaty provision that helps us with this? There are several articles that help us bump-up the ACB on other assets. Article XIII:6 of the treaty will allow you to bump up the ACB on your principal residence and Article XIII:7 allows you to bump up the ACB on your non-registered public shares. Does this article not apply to private shares as well?
Lifetime Capital Gains Exemption on Departure
Moderator: Mark T Serbinski CA CPA
Are they truly deemed to be disposed, or are you electing to treat them as disposed?
If you are electing, then you don't get the bump-up associated with XIII.7. If the are deemed disposed then you get the bump-up when you eventually sell.
Private shares are (or at least were until 2010) exempt from deemed disposition. There has been a recent change in 2010 on this, so you may want to look into this.
Your shares may be deemed sold now and then also taxable later. I haven't really looked into this closely.
SeE:
http://www.blg.com/en/NewsAndPublicatio ... n_1571.pdf
As the technical explanation of the new XIII.7 (which made the bump-up available to non-US citizens, when previously it was available only to US citizens),deos NOT apply to property that is excluded from the deemed disposition rules.
That would take care of any US tax on pre-arrival gains.
that would leave you to use the exemption to exclude Cdn taxation on some or all of that gain, subject to AMT.
If you are electing, then you don't get the bump-up associated with XIII.7. If the are deemed disposed then you get the bump-up when you eventually sell.
Private shares are (or at least were until 2010) exempt from deemed disposition. There has been a recent change in 2010 on this, so you may want to look into this.
Your shares may be deemed sold now and then also taxable later. I haven't really looked into this closely.
SeE:
http://www.blg.com/en/NewsAndPublicatio ... n_1571.pdf
As the technical explanation of the new XIII.7 (which made the bump-up available to non-US citizens, when previously it was available only to US citizens),deos NOT apply to property that is excluded from the deemed disposition rules.
That would take care of any US tax on pre-arrival gains.
that would leave you to use the exemption to exclude Cdn taxation on some or all of that gain, subject to AMT.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
I did some significant research on this previously and know with certainly that private shares are now deemed to be disposed on departure and this is generally your final tax obligation to Canada (aside from a few exceptions). In other words, after departure they generally become taxable based on residency; just like normal public shares, Canada Pension Plan, US Social Security, etc.
If you can now receive the bump-up to the ACB under the new XIII.7, I don’t see much of a downside using the exemption, provided the Alt Min Tax is not larger than the actual tax on the deemed disposition (which I assume would be rare). Like you, I always thought there must be a way to bump-up the ACB on the US side via treaty, but then I read JGCA’s post below and he seems to think you can’t; unless I’m interpreting it incorrectly? The post is relatively recent from 2014.
http://forums.serbinski.com/viewtopic.p ... ll&start=0
The part I’m confused about is where he says they are deemed to be sold on departure (which I agree with), but then he says the following “You could elect to however the deemed proceeds to occur and them claim your small business capital gain exemption on this sale so it would be tax free as long as its under $ 750K and it meet the qualifying requirements. The advantage is no tax ( but may have sizabale AMT tax owing in Canada of which you will not get back as a non resident) but you get no step up in the US on this and you use up the exemptipn in Canada so it has no relief to you in the US.â€
His wording is a bit poor when he mentions the part about an election. It’s almost as if he contradicts himself. First he says they are deemed to be disposed, but then in the next paragraph he mentions the election.
If you can now receive the bump-up to the ACB under the new XIII.7, I don’t see much of a downside using the exemption, provided the Alt Min Tax is not larger than the actual tax on the deemed disposition (which I assume would be rare). Like you, I always thought there must be a way to bump-up the ACB on the US side via treaty, but then I read JGCA’s post below and he seems to think you can’t; unless I’m interpreting it incorrectly? The post is relatively recent from 2014.
http://forums.serbinski.com/viewtopic.p ... ll&start=0
The part I’m confused about is where he says they are deemed to be sold on departure (which I agree with), but then he says the following “You could elect to however the deemed proceeds to occur and them claim your small business capital gain exemption on this sale so it would be tax free as long as its under $ 750K and it meet the qualifying requirements. The advantage is no tax ( but may have sizabale AMT tax owing in Canada of which you will not get back as a non resident) but you get no step up in the US on this and you use up the exemptipn in Canada so it has no relief to you in the US.â€
His wording is a bit poor when he mentions the part about an election. It’s almost as if he contradicts himself. First he says they are deemed to be disposed, but then in the next paragraph he mentions the election.
That is incorrect based on my previous post. The new wording in that article makes ALL property that was subject to deemed disposition BY CRA (and not by election) as eligible for bump-up, using IRS Rev Proc 2010-19.
JGCA did not take into account that deeming the property you are discussing as sold is no longer an election, since the rule change in 2010.
You would just have no not meet the eceptions, which are generally that the Cdn firm doesn't deal primarily in resources or real estate.
Your link didn't work, btw.
JGCA did not take into account that deeming the property you are discussing as sold is no longer an election, since the rule change in 2010.
You would just have no not meet the eceptions, which are generally that the Cdn firm doesn't deal primarily in resources or real estate.
Your link didn't work, btw.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Ok thanks so much Nelsona, this was my understanding as well. I just got confused after reading the post from JGCA. It just didn't make any sense to me and thought I should investigate this further.
Sorry about the link, here it is again.
http://forums.serbinski.com/viewtopic.p ... t=goodwill
Sorry about the link, here it is again.
http://forums.serbinski.com/viewtopic.p ... t=goodwill
Hi Nelsona,
I just have a quick follow-up question on the private shares. Because the shares will be deemed to be disposed, I suppose this means I will have to get a professional valuation of the shares to determine the gain/loss. From what I have read this is a fairly expensive process. Is there an alternative option to avoid the high cost of the valuation? In the link I posted from JGCA above, he mentions that the value of the company is basically the retained earnings on hand plus any other items such as goodwill etc. I’m guessing that if CRA ever questioned the gain you report on the departure return, just providing CRA with a copy of your financial statements showing the retained earnings will not be sufficient.
If there is no way around the valuation, do you know a reputable company that offers this service for a reasonable fee? I've read that for companies that have multiple shareholders, you may be able to convince the other owners to split on the cost of the valuation as they may have a reason to have a valuation done for other reasons, but if you are the sole shareholder it sounds like this process can get pretty expensive.
I just have a quick follow-up question on the private shares. Because the shares will be deemed to be disposed, I suppose this means I will have to get a professional valuation of the shares to determine the gain/loss. From what I have read this is a fairly expensive process. Is there an alternative option to avoid the high cost of the valuation? In the link I posted from JGCA above, he mentions that the value of the company is basically the retained earnings on hand plus any other items such as goodwill etc. I’m guessing that if CRA ever questioned the gain you report on the departure return, just providing CRA with a copy of your financial statements showing the retained earnings will not be sufficient.
If there is no way around the valuation, do you know a reputable company that offers this service for a reasonable fee? I've read that for companies that have multiple shareholders, you may be able to convince the other owners to split on the cost of the valuation as they may have a reason to have a valuation done for other reasons, but if you are the sole shareholder it sounds like this process can get pretty expensive.