I am currently a US citizen and may be taking a new job in Canada. I am also planning on cashing out my ISO (about $600K in profits) in Jan 2006.
How do I deal with this income from a tax perspective? My goal ins't to avoid US capital gain taxes, it just so happens I may be taking a new job in Canada that happens to coencide with the cashing out my ISO.
Am I better off selling before I move to Canada or does it not matter.
Lastly, if I net around $200K in taxable income a year is my tax rate higher or lower by living in Ontario, CA vs. CA, USA
Thx for your help.
capital gains on exercising/selling ISO stock
Moderator: Mark T Serbinski CA CPA
Since you are a US citizen, you won't be able to 'hide' anything form US taxaton, as you could have if you were not a US citizen.
So, you question then becomes what is the best way to minimize Cdn tax: That is almost always to take any income <b>before </b> becoming a Cdn resident.
By waiting to be a non-resident, you would avoid Cali tax on this income but Ontario tax would still probably be more than Cali tax.
Annually though, despite how high you may think Cali tax is, IRS + Cali tax on income above the SS threshold will not be as high as in canada.
<i>nelsona non grata... and non pro</i>
So, you question then becomes what is the best way to minimize Cdn tax: That is almost always to take any income <b>before </b> becoming a Cdn resident.
By waiting to be a non-resident, you would avoid Cali tax on this income but Ontario tax would still probably be more than Cali tax.
Annually though, despite how high you may think Cali tax is, IRS + Cali tax on income above the SS threshold will not be as high as in canada.
<i>nelsona non grata... and non pro</i>
Hmmm - the company I would be joining is HQ'ed in Ontario but has offices in the US. I have the option of working at either location, but in order to get the job done optimally would prefer to be based in Ontario. I will most likely just work for the company in Canada for 3 about years before returning to the states.
So, if CA+Ont tax is more than US+Cali tax, then I should try to keep my residence in US even though I would be working/spending majority of time in Canada. I own a home in Cali and was planning to rent it out and buy a home in Ont. Any recommendations on what I should do?
Most likely I will need to buy some of your time/help, but any assistance in the meantime is much appreciated. It may be I need to negotiate a higher comp package to offset the higher taxes.
So, if CA+Ont tax is more than US+Cali tax, then I should try to keep my residence in US even though I would be working/spending majority of time in Canada. I own a home in Cali and was planning to rent it out and buy a home in Ont. Any recommendations on what I should do?
Most likely I will need to buy some of your time/help, but any assistance in the meantime is much appreciated. It may be I need to negotiate a higher comp package to offset the higher taxes.
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Norbert Schlenker
- Posts: 68
- Joined: Sun Nov 21, 2004 1:22 pm
- Location: The Dry Side of the Wet Coast
- Contact:
Before going any further, you need to clarify exactly what you mean by "$600K in profits" for the ISO.
If you have not exercised yet, then it's probably better to exercise while you're still in the US, just to avoid the complication of taxation in both countries.
If you have exercised and are holding the stock, then it is critical to know whether you're past the 1 year holding period. If not, the US+CA taxes will be punitive on sale. If you are, then it would be tempting to sell in the US, but you're still going to lose more than 20% to the fed and state. There is a real temptation to hold the stock until after moving to Canada because (1) for Canadian purposes, your basis is reset on entry date and (2) no matter what, you'll avoid the CA tax.
Tax is not the only issue. $600k is a large chunk of money to tie up in the fortunes of any company, let alone your employer. You should be thinking hard about diversification.
If you have not exercised yet, then it's probably better to exercise while you're still in the US, just to avoid the complication of taxation in both countries.
If you have exercised and are holding the stock, then it is critical to know whether you're past the 1 year holding period. If not, the US+CA taxes will be punitive on sale. If you are, then it would be tempting to sell in the US, but you're still going to lose more than 20% to the fed and state. There is a real temptation to hold the stock until after moving to Canada because (1) for Canadian purposes, your basis is reset on entry date and (2) no matter what, you'll avoid the CA tax.
Tax is not the only issue. $600k is a large chunk of money to tie up in the fortunes of any company, let alone your employer. You should be thinking hard about diversification.
<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote">So, if CA+Ont tax is more than US+Cali tax, then I should try to keep my residence in US even though I would be working/spending majority of time in Canada.<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
Indeed. Except for the fact that when physically working in Ontario, you will be liable for Cdn+Ont tax on that wage income, regardless of where you reside, besides having to report it in US and california, if you live there.
So, if most of your income is wages, living in place you work is always the simplest and ultimately cheapest tax.
<i>nelsona non grata... and non pro</i>
Indeed. Except for the fact that when physically working in Ontario, you will be liable for Cdn+Ont tax on that wage income, regardless of where you reside, besides having to report it in US and california, if you live there.
So, if most of your income is wages, living in place you work is always the simplest and ultimately cheapest tax.
<i>nelsona non grata... and non pro</i>
In regards to my ISO - I have yet to exercise any of the options my plan was to just to a buy/sell. Given AMT taxes issues on how ISO is treated in US/Cali I did not want to buy/hold for a year in order to only get taxed at a long term capital gains rate.
So, based on what you are saying then it is better to exercise prior to taking residency in Ontario and then sell after establishing residency. This way I avoid CA state taxes on the short term capital gain. However, will I still have to pay Ontario provicial taxes on the gain.?
So, based on what you are saying then it is better to exercise prior to taking residency in Ontario and then sell after establishing residency. This way I avoid CA state taxes on the short term capital gain. However, will I still have to pay Ontario provicial taxes on the gain.?
<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote">will I still have to pay Ontario provicial taxes on the gain.?<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
You will have to pay Cdn and Ontario tax on the gain based on its value on the day you move to Canada and the proceeds when you sell.
Incidentally, you would not be able to use any US tax paid on this transaction as a foreign tax credit on your Cdn return. However, you would be entitled, in the quirky world of US tax treaties, to use the Cdn tax as a foreign tax credit on your your US return. This is by "re-sourcing" the gain as foreign income by the treaty.
As a US citizen living in Canada (with income over and above making the $80,000 foreign earned income exclusion), you will have to get used to the foreign tax credit rules in both countries. They are not as straightforward as if you were a non-US citizen.
<i>nelsona non grata... and non pro</i>
You will have to pay Cdn and Ontario tax on the gain based on its value on the day you move to Canada and the proceeds when you sell.
Incidentally, you would not be able to use any US tax paid on this transaction as a foreign tax credit on your Cdn return. However, you would be entitled, in the quirky world of US tax treaties, to use the Cdn tax as a foreign tax credit on your your US return. This is by "re-sourcing" the gain as foreign income by the treaty.
As a US citizen living in Canada (with income over and above making the $80,000 foreign earned income exclusion), you will have to get used to the foreign tax credit rules in both countries. They are not as straightforward as if you were a non-US citizen.
<i>nelsona non grata... and non pro</i>
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Norbert Schlenker
- Posts: 68
- Joined: Sun Nov 21, 2004 1:22 pm
- Location: The Dry Side of the Wet Coast
- Contact:
<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote">In regards to my ISO - I have yet to exercise any of the options my plan was to just to a buy/sell. Given AMT taxes issues on how ISO is treated in US/Cali I did not want to buy/hold for a year in order to only get taxed at a long term capital gains rate.
So, based on what you are saying then it is better to exercise prior to taking residency in Ontario and then sell after establishing residency. This way I avoid CA state taxes on the short term capital gain. However, will I still have to pay Ontario provicial taxes on the gain.?
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
If you exercise and immediately sell an ISO option, it's taxed as if it's an NQSO, i.e. regular employment income. California will ding you for 9.3% on most of it, the feds about 36% (the 35% top rate plus another ~1% because your itemized deduction on the state tax will be in the phaseout), plus another 1.45% for FICA Medicare. Expect to lose 46.8% to the tax man. And people think Canadian taxes are bad!
You can't really exercise and sell once you're in Ontario. Top marginal rates there are 48+%, so it saves you nothing.
The best is to exercise while in the US, move to Ontario, and then sell. Very little is then taxable by either Ontario or Canada - your basis for Canadian purposes is market value on entry so there is little capital gain to tax. The IRS will still want its pound of flesh because you're selling within a year of exercise, so you will lose 36.45% to them. But there's a chance - no guarantee because the California FTB is famous for chasing ex-residents for tax on income that they feel was actually earned in California - that you will escape California's bite by doing this. This cannot leave you worse off than if you exercise and sell before moving, and it may be better.
So, based on what you are saying then it is better to exercise prior to taking residency in Ontario and then sell after establishing residency. This way I avoid CA state taxes on the short term capital gain. However, will I still have to pay Ontario provicial taxes on the gain.?
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
If you exercise and immediately sell an ISO option, it's taxed as if it's an NQSO, i.e. regular employment income. California will ding you for 9.3% on most of it, the feds about 36% (the 35% top rate plus another ~1% because your itemized deduction on the state tax will be in the phaseout), plus another 1.45% for FICA Medicare. Expect to lose 46.8% to the tax man. And people think Canadian taxes are bad!
You can't really exercise and sell once you're in Ontario. Top marginal rates there are 48+%, so it saves you nothing.
The best is to exercise while in the US, move to Ontario, and then sell. Very little is then taxable by either Ontario or Canada - your basis for Canadian purposes is market value on entry so there is little capital gain to tax. The IRS will still want its pound of flesh because you're selling within a year of exercise, so you will lose 36.45% to them. But there's a chance - no guarantee because the California FTB is famous for chasing ex-residents for tax on income that they feel was actually earned in California - that you will escape California's bite by doing this. This cannot leave you worse off than if you exercise and sell before moving, and it may be better.
OK - thanks for your advice. Rather than take up more of your time I will contact you offline to procure some tax advice when I get close to making this career decision.
Last question - how is it determined that I was US resident when I exercised and am a CA resident when I sold. Most likely the transition of me renting my current house and moving the family to Ontario + buying new home will happen over a 3 month time period.
Last question - how is it determined that I was US resident when I exercised and am a CA resident when I sold. Most likely the transition of me renting my current house and moving the family to Ontario + buying new home will happen over a 3 month time period.
<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote">The IRS will still want its pound of flesh because you're selling within a year of exercise, so you will lose 36.45% to them.<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
Questions about diversification aside, there would seem to be a huge advantage to holding these funds for one year after exercise.
No need to throw away 16% tax in haste. The Cdn tax risk in holding the stock for a year is minimal, since it will not exceed the US rate.
And, the longer you wait, especially past the year you leave Cali, the better chance that FTB will not want their cut.
<i>nelsona non grata... and non pro</i>
Questions about diversification aside, there would seem to be a huge advantage to holding these funds for one year after exercise.
No need to throw away 16% tax in haste. The Cdn tax risk in holding the stock for a year is minimal, since it will not exceed the US rate.
And, the longer you wait, especially past the year you leave Cali, the better chance that FTB will not want their cut.
<i>nelsona non grata... and non pro</i>
<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote">how is it determined that I was US resident when I exercised and am a CA resident when I sold. <hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
The day when you establish sufficient residential ties in canada, that will be the day you become a Cdn tax resident.
This is generally the day you move enough 'stuff' to your new home and your family lives there.
But, as I said in my previous post, there is no need to be hasty in selling your stock after exercise.
Exercise well before you get a place in canada, and sell a year later for the favourable cap gains rate.
<i>nelsona non grata... and non pro</i>
The day when you establish sufficient residential ties in canada, that will be the day you become a Cdn tax resident.
This is generally the day you move enough 'stuff' to your new home and your family lives there.
But, as I said in my previous post, there is no need to be hasty in selling your stock after exercise.
Exercise well before you get a place in canada, and sell a year later for the favourable cap gains rate.
<i>nelsona non grata... and non pro</i>