Calculating Capital Gains on pre-move Publicly Traded Stock

[joeinusa]

On moving to the US, deemed disposition on Canadian return set a value on each of the of stocks that my wife and I owned, several of which has been sold in 2006 (mostly takeovers). On some of the other posts on this site, I gather that we can use the original cost or the cost on the date moved to US (deemed value). The latter by involving the US-Canada tax treaty and explaining this on form 8833.
Can we invoke the treaty for one stock but not another? In some cases the original cost was higher and in others, the deemed disposition value would be higher. If we need to be consistent, how consistent? Can we in some years use deemed and other years use original cost? We currently file jointly but would that answer be different if we filed married filing separately?

[nelsona]

Yes, you may (and should) invoke this on a stock by stock basis.

However, when selling stock, remeber that for US purposes, you are selling SPECIFIC stocks, not an average stock.

So, when you sell, unlike Canadaian rules, you are supposed to identify which of your shares you are selling, and determine the cost from this. If you cannot identify them, then you are selling the earliest bought shares.

So, each time you would making a partial sale, you would determine if it to your advantage to use the deemed value or the purchase price of stocks in question.

[joeinusa]

I discussed this with Mark Serbinski. He is suggesting that one cannot choose as you have suggested.

Mark told me that for U.S. residents that were previously Canadian residents, you use the original cost of each security, unless you elected to declare the "deemed" value and pay tax in the U.S. in the year of your departure from Canada.

I am wondering about the difference between what you and he are telling me and plan to ask him about it when I can get a hold of him. I am wondering if he has had some people audited or is this just a very safe stance to prevent any chance of problems.

I am also wondering if you had seen people choosing to use deemed disposition value (without the election in the US in the year of arrival) and has this survived an audit. Also perhaps this worked for a few people when it would not have made a significant difference in taxes owing.

On the other hand if Mark is being overly cautious, I would be interested as I have some significant deem disposition income that was taxed once when I moved to US and may be taxed once more when the gains are actually realized.

[nelsona]

Mark told me that for U.S. residents that were previously Canadian residents, you use the original cost of each security, unless you elected to declare the "deemed" value and pay tax in the U.S. in the year of your departure from Canada.

That was the case, up until Sept 19, 2000. He is referring to Article XIII(7) which states:

Where at any time an individual is treated for the purposes of taxation by a
Contracting State as having alienated a property and is taxed in that State by reason thereof and the domestic law of the other Contracting State at such time defers (but does not forgive) taxation, that individual may elect in his annual return of income for the year of such alienation to be liable to tax in the other Contracting State in that year as if he had, immediately before that time, sold and repurchased such property for an amount equal to its fair market value at that time.

By agreement signed between US and canada on above date, US is now allowing the deemed value to become the cost basis. In effect, US will 'forgive' pre-arrival growth.

This was well-publicized at the time in the industry, and Mark should be well-aware of it.

http://www.ustreas.gov/press/releases/ls883.htm

It is being used presently.

[nelsona]

... and yes, I have found on some issues that mark is 'cautious'.

[nelsona]

The treaty protocal which is now in effect, confirms what I have said for 7 years, that you may, on a stock by stock basis, use the Cdn deemed disposition value in determining cost basis, for all departures made after Sept 17 2000.