If a US citizen living in Canada sells a US stock at a loss and immediately buys it back in his IRA, I understand that both countries disallow the loss. But what happens if the bulk of the loss was long-term (>1 year) but the portion that was short-term was actually a gain?
It appears that despite a large overall "loss", for US tax you'd still have a short-term gain (since all the long-term gain is disallowed due to wash sale) and long-term losses cannot offset short-term losses. For Canada, which does not differentiate between short & long-term, the entire loss (from all shares) is disallowed.
Is there any way to offset the US tax owed on the short-term gain, perhaps by re-sourcing back from the Canadian return? The logic here is that by the US definition of "capital gain", there was a gain on the transaction. (If I understand the Canadian rules correctly, the only reason the Canadian transaction is a $0 gain/loss is because the "superficial loss rule" forces you to bump up your ACB to market value... but from a US perspective/definition, there's still a gain, so you should be able to re-source back a portion of your Canadian tax as an FTC to cover it.)
Wash Sales in US/Canada
Moderator: Mark T Serbinski CA CPA
Did you sell the stock in a non-IRA, i.e., regular investment account, and then buy back inside your IRA?
I think for US tax this is a wash sale and the loss is disallowed. Which is too bad, and I can't see anyway around it. Did you already do this trade? Maybe someone else knows a way around it.
In Canada this loss would not be considered a superficial loss, and would still be a capital loss. In other words you can sell a loser outside your retirement account (eg. RRSP) and buy it immediately inside your RRSP and they won't apply the superficial loss rules. And I think that they would view the IRA the same. So you should be able to include a capital loss on Cdn tax, but this can only offset capital gains.
Also why do you have any short term gain? You said you sold it at a loss, and once its inside the IRA the gains/losses don't matter anymore.
And one more thing, Canada will only see a gain or loss based on the FMV at the time you moved to Canada if you owned this stock before you moved.
I think for US tax this is a wash sale and the loss is disallowed. Which is too bad, and I can't see anyway around it. Did you already do this trade? Maybe someone else knows a way around it.
In Canada this loss would not be considered a superficial loss, and would still be a capital loss. In other words you can sell a loser outside your retirement account (eg. RRSP) and buy it immediately inside your RRSP and they won't apply the superficial loss rules. And I think that they would view the IRA the same. So you should be able to include a capital loss on Cdn tax, but this can only offset capital gains.
Also why do you have any short term gain? You said you sold it at a loss, and once its inside the IRA the gains/losses don't matter anymore.
And one more thing, Canada will only see a gain or loss based on the FMV at the time you moved to Canada if you owned this stock before you moved.
That is incorrect. This transaction would be considered a "superficial loss" by the CRA even when the security is repurchased in a retirement account. So the entire transaction is definitely a "superficial loss" in Canada. Unfortunately, the US differentiates between short-term and long-term gains/losses. Certainly the long-term losses are a "wash sale" and disallowed, but the problem/question relates to the amounts held <1 year which show a short-term gain (even though the overall sale was at a "loss").
So with those clarifications, I'll go back to my original question:
Is there any way to offset the US tax owed on the short-term gain, perhaps by re-sourcing back from the Canadian return? The logic here is that by the US definition of "capital gain", there was a gain on the short-term portion of the transaction. (If I understand the Canadian rules correctly, the only reason the Canadian transaction is a $0 gain/loss is because the "superficial loss rule" forces you to bump up your ACB to market value... but from a US perspective/definition, there's still a gain, so you should be able to re-source back a portion of your Canadian tax as an FTC to cover it.)
So with those clarifications, I'll go back to my original question:
Is there any way to offset the US tax owed on the short-term gain, perhaps by re-sourcing back from the Canadian return? The logic here is that by the US definition of "capital gain", there was a gain on the short-term portion of the transaction. (If I understand the Canadian rules correctly, the only reason the Canadian transaction is a $0 gain/loss is because the "superficial loss rule" forces you to bump up your ACB to market value... but from a US perspective/definition, there's still a gain, so you should be able to re-source back a portion of your Canadian tax as an FTC to cover it.)
The only time you can re-source US income to canada is if the US tax is denied credit in canada because it was only due to your being a USC. Thtat is it.
That said, any investments you buy and sell (other than US real estate and resources) are ALL considered Cdn-sourced to begin with, so there is no need to re-source this income: it's alreqdy considered Cdn.
That said, any investments you buy and sell (other than US real estate and resources) are ALL considered Cdn-sourced to begin with, so there is no need to re-source this income: it's alreqdy considered Cdn.
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Hi Nelsona,
To be clear, this investment was a US stock. As a Canadian resident, I understand the CRA treats this as Cdn sourced. But as a USC that has a gain/loss on a US stock, I thought the IRS considered it US-sourced? ...and that was why re-sourcing was necessary in order to get credit for the Cdn taxes on the US return. Would the US actually consider a gain/loss on a US stock as Cdn sourced?
So where does this leave us in terms of the situation I described? Where/how do you recover the US capital gains tax on the US short-term gain?
Thanks.
To be clear, this investment was a US stock. As a Canadian resident, I understand the CRA treats this as Cdn sourced. But as a USC that has a gain/loss on a US stock, I thought the IRS considered it US-sourced? ...and that was why re-sourcing was necessary in order to get credit for the Cdn taxes on the US return. Would the US actually consider a gain/loss on a US stock as Cdn sourced?
So where does this leave us in terms of the situation I described? Where/how do you recover the US capital gains tax on the US short-term gain?
Thanks.
Hi Nelsona,
To be clear, this investment was a US stock. As a Canadian resident, I understand the CRA treats this as Cdn sourced. But as a USC that has a gain/loss on a US stock, I thought the IRS considered it US-sourced? ...and that was why re-sourcing was necessary in order to get credit for the Cdn taxes on the US return. Would the US actually consider a gain/loss on a US stock as Cdn sourced?
So where does this leave us in terms of the situation I described? Where/how do you recover the US capital gains tax on the US short-term gain?
Thanks.
To be clear, this investment was a US stock. As a Canadian resident, I understand the CRA treats this as Cdn sourced. But as a USC that has a gain/loss on a US stock, I thought the IRS considered it US-sourced? ...and that was why re-sourcing was necessary in order to get credit for the Cdn taxes on the US return. Would the US actually consider a gain/loss on a US stock as Cdn sourced?
So where does this leave us in terms of the situation I described? Where/how do you recover the US capital gains tax on the US short-term gain?
Thanks.
It doesn't matter that the stock is a US stock. Otherwise every Cdn with google shares would owe US tax.
The treaty is clear that gains from such stocks are sourced in Canada.
The DIVIDENDS from those stocks are US-sourced. That is why US tax is withheld by Cdn brokers on US dividends.
It doesn't matter that your broker is in US or not.
You calculate the gains/losses by the rules of each country. If it turns out that there is a gain in one and not the other, then there is no credit to be had. This happens when, say, deemed acquisition rules make Cdn tax zero on a stock sale but taxable in US. No credit. Like in your case, you don't recover.
Lesson learned. Balnce out your short term gains with suficient losses.
The treaty is clear that gains from such stocks are sourced in Canada.
The DIVIDENDS from those stocks are US-sourced. That is why US tax is withheld by Cdn brokers on US dividends.
It doesn't matter that your broker is in US or not.
You calculate the gains/losses by the rules of each country. If it turns out that there is a gain in one and not the other, then there is no credit to be had. This happens when, say, deemed acquisition rules make Cdn tax zero on a stock sale but taxable in US. No credit. Like in your case, you don't recover.
Lesson learned. Balnce out your short term gains with suficient losses.
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As to the question of whether the transfer of a losing position to an RRSP is a superficial loss, I'm not so sure it is.
But even if the loss was recognozed, you still dont get to recover anything from US. You only get to recover tax paid on income, not cap losses.
But even if the loss was recognozed, you still dont get to recover anything from US. You only get to recover tax paid on income, not cap losses.
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Ive checked. These losses are considered superficial only if in-kind transfer..
However having RRSP buy the stock is not a superficial loss. Now whether CRA views the relationship between you and your RRSP (as unaffiliated persons) the same as your and your IRS, I would say yes.
Don't make in-kind contributions of losing positions.
However having RRSP buy the stock is not a superficial loss. Now whether CRA views the relationship between you and your RRSP (as unaffiliated persons) the same as your and your IRS, I would say yes.
Don't make in-kind contributions of losing positions.
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Note: budget of 2004 changed this to make RRSP and the person affiliated. RRSP purchase of recently sold stock DOES trigger superficial loss rules.
Don't know about person and IRA, but I would assume same.
Don't know about person and IRA, but I would assume same.
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http://canadianfinancialdiy.blogspot.co ... -loss.html
Based on the wording IRA is a trust, thus same rule as US.
Based on the wording IRA is a trust, thus same rule as US.
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The reason I thought capital gains on US securities were considered US sourced (and eligible for re-sourcing on the US return) was based on what you told me in the following thread: [url]http://forums.serbinski.com/viewtopic.p ... 8&start=30[/url]
This is your comment from 22 May 2007 20:16 which seems to contradict what you said today.
"I should have been more clear. Gains arising from the sale of stock in US comapnies is considered US-sourced. However it is not considered foreign income eligible for foreign tax credit, since it would not be taxable in US to a non-citizen. They are Us-sourced if they are from US-based companies (not the brokerage), but are treated by Canada, by treaty, to be like they are Cdn -sourced, since no tax credit is given.
The US, by the saving cluse, ignores this re-sourcing by canada, but then allows you to re-source them by the double-taxation relief cluses. "
p.s. thanks for verifying the superficial loss rule for RRSP/IRA. What you found confirms my own research.
This is your comment from 22 May 2007 20:16 which seems to contradict what you said today.
"I should have been more clear. Gains arising from the sale of stock in US comapnies is considered US-sourced. However it is not considered foreign income eligible for foreign tax credit, since it would not be taxable in US to a non-citizen. They are Us-sourced if they are from US-based companies (not the brokerage), but are treated by Canada, by treaty, to be like they are Cdn -sourced, since no tax credit is given.
The US, by the saving cluse, ignores this re-sourcing by canada, but then allows you to re-source them by the double-taxation relief cluses. "
p.s. thanks for verifying the superficial loss rule for RRSP/IRA. What you found confirms my own research.
I'll have to re-read the clause.
In any event. If they are US-sourced, you have no Cdn income to report and thus no credit in canada. No re-sourcing by treaty because this is nota re-sourcing situation, since Canada di not deny you a tax credit based on citizenship, you simply were not enetitled to one due to showing no income.
If it is Cdn-source, then you reprt it as foreign income on your US return, but you have no Cdn tax to claim towrds the credit. If you have passive carryforward/back from other years you could use it on this years return.
In any event. If they are US-sourced, you have no Cdn income to report and thus no credit in canada. No re-sourcing by treaty because this is nota re-sourcing situation, since Canada di not deny you a tax credit based on citizenship, you simply were not enetitled to one due to showing no income.
If it is Cdn-source, then you reprt it as foreign income on your US return, but you have no Cdn tax to claim towrds the credit. If you have passive carryforward/back from other years you could use it on this years return.
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In reviewing the double taxation and gains clauses, I would hve to amend my earlier statement. Note that my ORIGINAL statement in that thread was 'more' correct, and I should have just left it at that.
The treaty states that other than for real and resource property only the state of residence can tax gains.
The double taxation clause determines source as the country which is allowed taxation.
"Profits, income or gains of a resident of a [Canada] which may be taxed in the US in accordance with the Convention, for reasons other than the saving clause of paragraph 2 of Article XXIX (Miscellaneous Rules) (e.g., pensions and annuities taxable where arising pursuant to Article XVIII (Pensions and Annuities)), are deemed to arise in the US.
Since ordinary stock cannot be taxed in US unless the saving claause is invoked, then thse gains are Cdn-sourced.
It should also be pointed out in the tech expalnation wuth so many examples of re-sourcing, none was included for gains, because in general gains don't need re-sourcing, as the only ones that would be candictaes for re-sourcing woruld be rela property, but Canadawould never deny US tax on real property gains. The only re-sourcing that would take place would be to reduce double tax, not for reason of credit denial.
The treaty states that other than for real and resource property only the state of residence can tax gains.
The double taxation clause determines source as the country which is allowed taxation.
"Profits, income or gains of a resident of a [Canada] which may be taxed in the US in accordance with the Convention, for reasons other than the saving clause of paragraph 2 of Article XXIX (Miscellaneous Rules) (e.g., pensions and annuities taxable where arising pursuant to Article XVIII (Pensions and Annuities)), are deemed to arise in the US.
Since ordinary stock cannot be taxed in US unless the saving claause is invoked, then thse gains are Cdn-sourced.
It should also be pointed out in the tech expalnation wuth so many examples of re-sourcing, none was included for gains, because in general gains don't need re-sourcing, as the only ones that would be candictaes for re-sourcing woruld be rela property, but Canadawould never deny US tax on real property gains. The only re-sourcing that would take place would be to reduce double tax, not for reason of credit denial.
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