16b calculation

balle · Post by **balle** » Thu Mar 03, 2005 9:22 pm

I have browsed thru this forum and the old forum on the Grasmick and I believe I understand how line 16b (IRS) is calculated. However, I am a little confused a little about the following:

Invested in RRSP : $13K
Value when moved to US : $10K (1999)
Value when RRSP is distributed : $16K

On line 16a, I report $16K...
What do I do for line 16b :
a. $6k (this shows the cap gain when in the US.. but is not a real cap gain and I would be paying taxes on much more than I gained)
b. $3K (this is the real cap gain and erases the cap loss when in Canada.. how ever this does assume that RRSP was frozen on my move date)

I would think that $6k is the answer... any opinions

nelsona · Post by **nelsona** » Thu Mar 03, 2005 10:31 pm

The value when you moved is not really important:
In determining basis you choose the higher of

a. Your total contributions

or

b. the BOOK Value of all your investments (which is different than the market value) on the day you arrived.

What is book value?
Basically the price you paid, plus any dividends.

So if you bought $13K of funds, and didn't sell any, the book value would have remained $13K, even if the valuation on move day was $10K.

So, in your case the question is what was the book value of your RRSP on the day you moved to US.

nelsona non grata

nelsona · Post by **nelsona** » Fri Mar 04, 2005 12:45 am

Reinvested distribution affect book value, that's why I said book value and not purchase price.

I said: "Basically the price you paid, plus any dividends", dividends being any distribution, reinvested or otherwise.

Most Mutual fund RRSP statements keep track of this. It's usually termed average price, or somesuch.

The trick of course is (as everyone moving to US should know) to sell/switch all your RRSP investments just before moving (especially your winners) so that they get a fresh (higher) book value, and the added bonus of not having to trek back thru 5 years of quarterly's to find any historical info.

This really does not have to be complicated....

nelsona non grata

balle · Post by **balle** » Fri Mar 04, 2005 3:22 am

<blockquote id="quote">quote:<hr height="1" noshade id="quote">Originally posted by nelsona

The value when you moved is not really important:
In determining basis you choose the higher of

a. Your total contributions

or

b. the BOOK Value of all your investments (which is different than the market value) on the day you arrived.

What is book value?
Basically the price you paid, plus any dividends.

So if you bought $13K of funds, and didn't sell any, the book value would have remained $13K, even if the valuation on move day was $10K.

So, in your case the question is what was the book value of your RRSP on the day you moved to US.

nelsona non grata
<hr height="1" noshade id="quote"></blockquote id="quote">

Thanks.... this is a great help. What IRS document explains how to calculate 16b income?

Carson · Post by **Carson** » Fri Mar 04, 2005 5:18 pm

Martin, not to discount what rhollan has said, but the simple answer is that YES, the IRS will tax you on the example transaction as a capital gain.

Carson

balle · Post by **balle** » Fri Mar 04, 2005 5:42 pm

This does not make sense... I would think since the account is CDN$ account. All gains/losses should be calculated in CDN$. They should then be converted to US$ on the day the distribution is taken using the exchange rate of that day

In Martin's case, he realized a loss CDN$1000. This should be converted to US$ on 12/31/04 (the day the distibution is taken)

PS... Martin, based on what is described on this thread, you need to consider the book-value of the account on the day you entered US to determine you cap gain / loss

balle · Post by **balle** » Fri Mar 04, 2005 5:47 pm

Nelson... a bunch of example deferral forms are shown at

http://www.canadatotwincities.com/

In these forms, the monies are shown in US$ (and in CDN$). Is it important to calcuate the US$ value. Would it be OK to show on CDN$ amount. The problem I see is that the US$ amount is a function of the any cap gains and the xchange rate. It is important for the IRS to track on the cap gains. A US$ amount could fluctuate quite a bit without any cap gains/losses

nelsona · Post by **nelsona** » Fri Mar 04, 2005 9:12 pm

"Nelson... a bunch of example deferral forms are shown at

http://www.canadatotwincities.com/"

Who do you think wrote those examples?[:D]

They are correct.

I did not make any calculations on these RP statements as none are required.

All the statement requires is a year-end value in US$.

Any cap gains have to take into account the US$ value on buy and sell dates. Period.

Also, if you hold Cdn cash, and then convert it to another currency, you theoraetically have to ascertain its US value when you first got the money, and account for cap gains as well.

nelsona non grata

balle · Post by **balle** » Fri Mar 04, 2005 9:22 pm

So that means that Martin will have to pay tax to the IRS due to currency fluctuation even if he had a capital loss

nelsona · Post by **nelsona** » Fri Mar 04, 2005 9:45 pm

He didn't have a capital loss, he had a capital gain in US$.

We are talking about US taxes here are we not?

I'll give you an extreme example to illustrate:

Say you had $1000 in a TD bank account on the day you moved to US 5 years ago (worth: US$660).

If today, you took that $1000 (worth US$820, it wouldn't have made any interest, trust me) and changed it into US$, or british pounds, or bought a TV, or gave it to your granny, it would, by IRS rules, trigger a cap gains of $160.

There are floors to these transactions, but chage the bank account to $10K and you would exceed these limits.

So even a bank account, sitting in Canada doing nothing, is a potentil source of US capital gains, simply because of fluctuating curencies.

How do you think money traders make money? Do you think they somehow don't have to pay cap gains taxes?

nelsona non grata