Leaving Canada to USA on TN -- what to do?

jh · Post by jh » Sun May 13, 2007 4:19 pm

I'm a Canadian resident/citizen who will be relocating to NYC for a perm job on TN visa. I have a few questions:

- what do I need to do to avoid being double taxed?

- do I need to file some forms or claim something? if so, what are they?

- do I need to close my bank accounts, credit cards, drivers license, trading accounts, RRSP, divorce my wife?

- as a non-Canadian resident, can I trade in my RRSP account? and do I need to pay US tax on the capital gain?

nelsona · Post by **nelsona** » Sun May 13, 2007 5:57 pm

With foreign tax credits, there is very litle that is 'double-taxed'.

What you may be thinking about is having to report your US income (which will be taxed in US) on a Cdn tax return.

To avoid this, you need to move to US, preferably, but nt necessarily with your spouse. Little else need be done.

You need to read the "emigrants Guide" from CRA. You do not need to send NR73. Informing CRA that you are non-resident is most simply dome when filing your departing 2007 tax return, not before.

You other Cdn payors (bank, RRSP, tenamtns need to be advised as soon as you leave).

You RRS can only be traded by a US-licensed broker in Canada. You are best to "step-up" their cost basis by hifting assets around to give them a fresh cost basis, as this will be the basis for any future US tax. Your non-RRSP trading accounts will need to be closed, or left dormant.

jh · Post by jh » Mon May 14, 2007 10:48 am

Thank you nelsona.

- When should I file my departing 2007 tax return?

- So the capital gain in my RRSP account *is taxable* to IRS ?

- I don't understand the "step-up cost basis" part, could you please elaborate on that or where can I get more information?

Thank you.

nelsona · Post by **nelsona** » Mon May 14, 2007 9:16 pm

You will file your 2007 return next spring, like everyone else. Read the Emigrants guide yet?

There are many thrads on RRSP. Look for form 8891 threads.

Ultimately, you will be taxable on the growth of your RRSP after you move to US. So, you want to incur as much of it as possible BEFORE moving, which means taking all your current investments and shifting them around so that the "gains" are incurred before leaving. This is called "stepping up" the basis of your investments.

Likely, you will elect to defer taxation on your RRSP until you withdraw it, so that the tax in US will occur in the same year(s) as in Canada.

jh · Post by jh » Mon May 14, 2007 9:27 pm

Thank you nelsona.

Does this mean when I withdraw from RRSP, I will be double taxed? (by Canada and USA)

nelsona · Post by **nelsona** » Tue May 15, 2007 7:56 am

As I said at the outset, true 'double taxation' is rare. You report and pay tax in both countries. Credit for the tax you pay in Canada on your RRSPs will be credited in US.

nelsona · Post by **nelsona** » Tue May 15, 2007 7:57 am

Just to clarify, if you live in US, you "report and pay tax in both countries" on any Cdn income that you receive, with US giving you credit for Cdn tax paid.

jh · Post by jh » Tue May 15, 2007 8:02 am

Thanks nelsona, just trying to understand the "stepping up basis" a little more...

I've contributed 40K to my RRSP so far and have used the entire 40K to buy stocks a few years ago.
I've been holding the stocks over the past few years and the market-value of the portfolio is now 100K.
Suppose I move to the USA now, and continue to hold my portfolio until the market-value is eventually 170K.
If I then sell all my stocks at that time and take the entire 170K cash out of the RRSP account,
will the IRS tax me on the 70K (170-100) or 130K (170-40)?

What if I sell my portfolio now at the market-value of 100K, and then buy them back right away,
also at 100K, then move to the USA, and then when the market-value reached 170K I cash out.
Will the IRS tax me on the 70K (170-100) or 130K (170-40)?

I hope I'm on the right track.

nelsona · Post by **nelsona** » Tue May 15, 2007 8:31 am

Yes, you are exactly on track. Not selling exposes the extra 60K that you have made to US tax (eventaully, when you collase your RRSP).

Remmebr too, to be sure that your brokerage will allow trading in your account, based on your new state of residence. None of the states around NYC have any special issues, but the broker must comply with that state's requirements.

If your current broker is not compiant, TDWaterhouse is about the only broker that will accept new clients in your situation.

jh · Post by jh » Tue May 15, 2007 9:32 am

Thanks nelsona.

Does this "step up" concept apply to non-RRSP trading accounts as well?
Should I sell-and-buy-back all my stocks in my normal trading account right before I move to USA?

nelsona · Post by **nelsona** » Tue May 15, 2007 9:56 am

It is not necessary to step up your non-sheletered investments, as their tax treatment is not adversely affected in US by your move.

keep in mind though, that you will have deemed disposition departure tax to pay in Canada based on the day you leave, and will have to report your holdings on a form along with your departure tax return.

The IRS will permit you to use the deemed disposition value as your new cost basis.

One tip would be not to sell any of your 'losers' until you move to US, as this will get you a tax loss in both countries. (deemed disposition loss in Canada, real loss in US).

You will have to migrate your stocks to a US broker to do anything other than sell.

jh · Post by jh » Tue May 15, 2007 10:28 am

Thanks nelson a.

Do you mean if I bought a stock at $10 before, and it drops to $7 on the day I leave Canada, IRS will allow me to use either $10 or $7 as my new cost when I eventually report a capital loss in USA? and that if I choose to use $10 instead of $7, then I can take advantage of the $3 loss again?

nelsona · Post by **nelsona** » Tue May 15, 2007 11:11 am

Yes. Until 2000, it worked the other way too. If you held a stock bought at $4 and it went to $10 when you moved, and you then sold it, you were on the hook for $6 gain in both countries, with no foreign tax crdit avaliable in US and only a complicated foreign "backwards tax credit" in canada (by speciual permission of CRA only).

A special treaty provision was made to allow one to elect (if beneficial) to take their deemed dispo value as their new basis. So for gainers you use the deemed dispo value and for losers. You can pick and coose this (and remaber that US allows for the selling of 'specific stocks' not simply average cost basis. So you could sell a stock unit for a gin at the same time as selling a unit in the same stock for a loss.

jh · Post by jh » Tue May 15, 2007 11:43 am

Can I use the same trick for RRSP accounts as well? So right before I move down to the USA, I sell all the winners and buy them back right away, but don't sell the losers until after I moved down, this way, my cost is high right before I moved down. Would that work?

nelsona · Post by **nelsona** » Tue May 15, 2007 12:27 pm

You could. It will be less meaningful in the long-run, since you will be taxed only when you remove funds from your RRSP, not when you move investments around, and not on the basis of which instruments you sell at that time.

but your goal should be to enter US with the highest book value possibel.

Just a note, that your book value for RRSP purposes will be determined by when you become taxable in US. This will, at the latest, be on your departure date, but it could, eithr by election by you, or as a result of frequent visits to US early in a calendar year, be janury 1st 2007. If that is the case, then all the maneouvering you would do now in your RRS would have no bearing on its ultimate US taxability.

Just something to keep in mind when you choose how to file next spring in US.