Rev Proc 10-19 Guidance

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paul1980
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Rev Proc 10-19 Guidance

Post by paul1980 » Tue Jan 15, 2019 8:14 pm

I moved to the US several years ago on a TN visa, got married and now have a Green Card. I had no idea that I should have filed a departure return when I left Canada and have been filing returns in both Canada and the US each year, reporting my worldwide income in both.

I now realize I’ve probably been filing returns unnecessarily in Canada. I would like to fix this by filing a departure return in either 2018 or 2019.
My problem is this. Before I left Canada, I had a fairly large portfolio of Canadian mutual funds outside my RRSP in a gain position. Then when I got here, I purchased some US tech stocks which are now also up in value.

From some reading, it looks like I will be deemed to sell them both when I depart Canada, I just don’t want to get double taxed.

1) Does Rev Proc 10-19 allow me to increase my cost on the US stocks on the US side to prevent double taxation down the road when I sell them? Example, cost $100K, MV now at departure $250K. Will the election allow me to deem to dispose and report on US return in year of departure and now my new cost will be $250K?

2) Does Rev Proc 10-19 allow me to increase my cost on the Canadian mutual funds on the US side to prevent the gain before coming to US from being taxed in the US? Example, cost $100K, MV when moved to US $200K and MV now at departure $300K. Will the election allow me to increase cost to $200K so I’m only taxed on $100K in US when I sell them in future ($300K - $200K)?

Any guidance would be appreciated.

Paul

nelsona
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Re: Rev Proc 10-19 Guidance

Post by nelsona » Wed Jan 16, 2019 11:31 am

The purpose of RP 10-19 is indeed to ensure that you pay tax only once to each country, with Canada getting its money for when you lived there (at departure), and US getting its share when you live there (when you actually sell).

The problem, as you now know, is that all this (the deemed disposition, and the filing of RP 10-19), in the year you moved, and filed your first US tax return.

You have two possible solutions:
1. Fix your departure date. CRA may allow you to retroactively move and file a departure return for the year you left on what you had at that time. Hopefully you haven't received any benefit you were not entitled to (GST, CCTB, etc). Where did you pretend to live? What di you tell your RRSP and investment trustees about where you lived? pay Canada for gains up until that date. The problem with doing this, is that IRS would have expected you to file RP 10-19 in that year, not now. You would need to formally request permission to do this.

2. Do as you say and declare departure Jan 1 2018, and pay Canada gains up until that time, including any US investemnts. You would in essence be like a US citizen who lived in Canada until 2018. You would file RP 10-19 with your 2018 IRS return. IRS could balk at this when you eventually sell, but that would be a fight for later.
Nelsona Non grata. Non pro. Search previous posts.

paul1980
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Joined: Tue Aug 30, 2016 3:47 pm

Re: Rev Proc 10-19 Guidance

Post by paul1980 » Wed Jan 16, 2019 3:36 pm

Ok thank you.

My former principal residence is still in Canada and my elderly parents are now living there. I never changed my address with CRA or my investment advisor when I moved. They basically think I'm a cross border commuter. My income has been too high for GST or any other benefits, so nothing to worry about there.

I think I will try option #2. I have two follow-up questions or concerns if you wouldn't mind?

1) For the election on the US investments, do I actually need to report the deemed sale on my 1040 in 2018, or does this election just increase my cost to the market value on my departure and I just use the higher market value as my cost when I actually sell them in the future down the road?

2) With regards to my Canadian investments. Using the same example I provided below, if the IRS will only increase my cost to the value as of the date I arrived ($200K) and not the market value now at my departure ($300K), I would be exposed to double tax on the extra $100K of growth from the period of time that I lived in the US when I ultimately sell them correct ($300K - $200K)? I have to pay CRA tax on the entire amount now at departure ($200K gain). If I sell them in a future year, I won't have any foreign taxes to claim on the extra $100K on my 1040 then. So in essence, I pay tax on $200K to Canada and $100K to IRS for $300K total. If so, should I just actually sell them all now to avoid this?

Thanks for taking the time to help me with this.

nelsona
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Re: Rev Proc 10-19 Guidance

Post by nelsona » Wed Jan 16, 2019 4:21 pm

US residents are not allowed to trade in a non-RRSP account, and have some restrictions in their RRSP account. . as well, with US residents, Cdn brokers are obliged to report certain things to IRS, and withhold non-resident tax on dividends for CRA. Your brokers would be very displeased to find that you have been spoofing your address for all these years. You would want to tell them NOW

1. As I said, the US will only tax you at the time of actual sale. The RP provides them, with the adjusted cost basis, which will be identical to the deemed disposition on your departure forms, which you will use going forward in determining the US tax at final sale.

2. As to what value, this is the problem you face. The RP ONLY deals with deemed disposition value -- as filed on your Cdn departure return, and included on your RP statement on your first return in US. They *could* question a 2018 valuation for someone who has lived in US for many years prior. That would be the reason for correcting your departure return. Since it seems that you haven't sold any of these Cdn investments, they would probably accept the late filing of the RP, given that it is pretty obscure

Otherwise, I would probably be selling at least my Cdn investments now, since your broker will probably not wish to deal with you anymore, it doesn't quite solve the late deemed disposition issue, but at least it brings the 2 dates (and thus the 2 valuations) closer together.

And remember, for IRS purposes, your transactions occur in US dollars valued at the time of each purchase/transaction/disposition.
Nelsona Non grata. Non pro. Search previous posts.

paul1980
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Joined: Tue Aug 30, 2016 3:47 pm

Re: Rev Proc 10-19 Guidance

Post by paul1980 » Thu Jan 17, 2019 10:20 am

Thanks again for all your help! Correct, I have not sold any of the Canadian investments yet. I will give this some more serious thought before deciding how best to proceed. Maybe adjusting my departure return might actually be the better way to go.

I actually finally called my broker and told him a few days ago. After making a call to his head office, he seems to think I can keep the Canadian funds as a non-resident, but the account will be deemed a "sell only" account. Meaning I can't do anything except sell the funds. Which is fine with me for the time being.

One last question. Assuming I decide to keep the Canadian funds for now, if I decide to post security to CRA instead of paying the actual tax at departure, will this negatively impact my ability to use the Rev Proc election, or am I still OK to use it? In other words, is paying the actual tax at departure a requirement to be able to use the election?

Thanks.

nelsona
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Re: Rev Proc 10-19 Guidance

Post by nelsona » Thu Jan 17, 2019 1:51 pm

Posting security is fine. Its the deemed disposition valuation that is key.
Nelsona Non grata. Non pro. Search previous posts.

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