I'm a permanent resident with Nortel shares that had a large deemed disposition from 2000 when we moved to the USA. Nortel has declared bankruptcy and has recently delisted shares. They do not expect the shares to have any value after the process finishes. As I didn't sell the share, but they are being wound up by the company what happens to my deferral. Is there a re-adjustment process with CRA for this type of case... I know if I had sold them that I'd need to pay the deferred taxe and then claim on my US return the foreign taxes and the loss. Guidance on this is appreciated since little info seems to exist to clarify.
thanks
tony
Deemed disposition and share delisting due to bankruptcy
Moderator: Mark T Serbinski CA CPA
There are 2 possibilities here:
1. When Nortel is wound down, you will be deemed to have disposed the shares, at which point you need to pay the deemed dispo tax from 2000.
2. You never sell the shares, and 10 years goes by from departure, and you are thus no longer required to pay the 2000 tax (by treaty). After that you trigger the loss, only for US purposes.
My guess is that it is more likley #1.
But just to clarify if #1 is the case. In no circumstance is US supposed to grant you any foreign tax credit for your deemed dispo tax from 2000. Th correct method would be: sell the shares at a loss, claim the loss or gain (based on the purchase price, not the deemed price) on your US return and then -- on your 2000 Cdn return, claim a tax credit for any US TAX you pay on that deemed portion.
Example:
You buy in 1998 at $2, in Aug 2000 as you leave Canada it is $5, so you owe tax on $3. You defer the tax (or not, doesn't matter in example), and end up selling in 2008 at $12.
On your US return you owe tax on $10 ($12-$2 original purchase price). You pay the entire US tax, and then return to your 2000 Cdn return and reduse the deemed dispo tax by the US tax you paid on 'Canadian' portion of your gain $3, ($5-$2).
Same situation, now the sale prioce is ZERO, like nortel.
On US return you get $2 cap loss ($2 - 0) and on the tax on $3 that you deferred come due. There is no credit to be given anywhere. You still owe the original deemed dispo tax in canada, and no credit is given for any US tax, since none was paid.
You could use the deemed dispo tax that you deferred as a DEDUCTION on your US tax in the year you pay it, though.
This is one of the reasons the treat was modified (effective sept 2000) to make the deemed dispo price the new cost basis for all investments subject to deemed disposition.
1. When Nortel is wound down, you will be deemed to have disposed the shares, at which point you need to pay the deemed dispo tax from 2000.
2. You never sell the shares, and 10 years goes by from departure, and you are thus no longer required to pay the 2000 tax (by treaty). After that you trigger the loss, only for US purposes.
My guess is that it is more likley #1.
But just to clarify if #1 is the case. In no circumstance is US supposed to grant you any foreign tax credit for your deemed dispo tax from 2000. Th correct method would be: sell the shares at a loss, claim the loss or gain (based on the purchase price, not the deemed price) on your US return and then -- on your 2000 Cdn return, claim a tax credit for any US TAX you pay on that deemed portion.
Example:
You buy in 1998 at $2, in Aug 2000 as you leave Canada it is $5, so you owe tax on $3. You defer the tax (or not, doesn't matter in example), and end up selling in 2008 at $12.
On your US return you owe tax on $10 ($12-$2 original purchase price). You pay the entire US tax, and then return to your 2000 Cdn return and reduse the deemed dispo tax by the US tax you paid on 'Canadian' portion of your gain $3, ($5-$2).
Same situation, now the sale prioce is ZERO, like nortel.
On US return you get $2 cap loss ($2 - 0) and on the tax on $3 that you deferred come due. There is no credit to be given anywhere. You still owe the original deemed dispo tax in canada, and no credit is given for any US tax, since none was paid.
You could use the deemed dispo tax that you deferred as a DEDUCTION on your US tax in the year you pay it, though.
This is one of the reasons the treat was modified (effective sept 2000) to make the deemed dispo price the new cost basis for all investments subject to deemed disposition.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
-
Roseladay123
- Posts: 1
- Joined: Wed Aug 19, 2009 5:49 pm
Thanks
I came across this forum by chance and discovered this is one of the best thread ever. Thanks u guys so much for the information you give. So cool.
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