Dual Citizen, future Canadian resident capital gains exposure

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dualblues
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Joined: Tue Mar 16, 2021 1:50 am

Dual Citizen, future Canadian resident capital gains exposure

Post by dualblues »

Thanks for all your support!

Background: I am a dual citizen, residing in US for many years and investigating the tax implications of my return to Canada.

I wanted to double check what happens to my US brokerage holdings (stocks and funds when I establish residency in Canada). I want to make sure I am not unnecessarily exposing myself to capital gains (and taxes).

Here is what I have read will happen (paraphrased):
1) Once you establish residency, you are deemed to have disposed of all your property immediately for fair market value at the time.
2) You are deemed to have acquired the property at a cost equal to fair market value.

Consequences:
A) This deemed disposition would mean capital gains (which are taxable federally and at same rate as income in California).
B) I wouldn't have the opportunity to cherry pick winners and losers (for managing capital gains).
C) Acquired prices in Canada would have been "stepped up".

Assuming above is true, I guess, there is little difference between transferring brokerage assets to a Canadian broker and selling the assets, transferring the cash, and purchasing the investments in my Canadian brokerage account.

Anyone else found a legal work-around to control taxes in this area?

Cheers
nelsona
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Re: Dual Citizen, future Canadian resident capital gains exposure

Post by nelsona »

A, No. IRS and Cali do not recognize deemed disposition/acquisition. It is a non-event in US. You will only end up paying cap gains in US (not to cali) when you actually sell, by which time they will be considered foreign passive income.
B. You would be advised to sell losers for sure, as you will not need to use cap losses much after leaving US.
C. For Cdn purposes only, yes.
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
dualblues
Posts: 23
Joined: Tue Mar 16, 2021 1:50 am

Re: Dual Citizen, future Canadian resident capital gains exposure

Post by dualblues »

Thanks nelsona for your response,

This is great news! I mistakenly inferred the "step-up" meant capital gains were realized immediately. I am learning a lot!

Thus, a dual citizen, US resident (me) would then have the option to:
1) realize their capital gains in US prior to departure;
2) realize the capital gains once in Canada.

Is there a quick and dirty way to compare these options? (I have trouble reasoning about 2 even under simple circumstances. Below is my attempt. (It doesn't take into account currency exchanges). I am just trying to get a better understanding of how to reason about the options..Perhaps there are heuristics that experts use?

Option (1). Normal US taxes. I used an online calculators to get an estimate. In my case, I use my estimated income as well as 100k long term capital gains. (Income, CA taxes, net investment income and 15% fed tax rate all play a part). The fed+state taxes on the long term gains were: $24,300.

Option (2). In this case, I assumed there was no other income (sale done in next tax year). Plugging some numbers into an online calculator for Canada, resulted in taxes of around $8000 (for Canada+Ontario). This would give you a foreign tax credit to apply to your US taxes. The US taxes would then be for on 100k of foreign passive income. Not sure how to tax foreign passive income:
A) income - taxes around 16K
B) long term capital gains: 0 (Married filing jointly 24,800 standard deduction)

In this case, Option 2 is preferable (for a tax bill of either A) 16K B) 8k)? Also, you could repeat in subsequent years to realize the gains with low income (and avoid state taxes).

Are my calculations way off? (Is this typically the case for changing residency - avoid state taxes and realize gains when income lower in new residence)?


Regards!
nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
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Re: Dual Citizen, future Canadian resident capital gains exposure

Post by nelsona »

When you say realize, you mean SELL, there is no other way to realize the gains.

You won't have state tax once you leave US. You will only file IRS 1040.

In Canada you should not have much gains for a while, since your investments have a new cost basis on arrival date. So don't count on much foreign tax credit on 1040. Your main concern should be selling losers before leaving, and not selling winners until you are no longer in cali.
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
nelsona
Posts: 16947
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Dual Citizen, future Canadian resident capital gains exposure

Post by nelsona »

The only issue you moght habve is with any US mutual finds: you must sell these as you can't own these in Canada (and you must close your US non-retirement accounts). Transfers of other items will not trigger cap gains, only actual sales will.
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
dualblues
Posts: 23
Joined: Tue Mar 16, 2021 1:50 am

Re: Dual Citizen, future Canadian resident capital gains exposure

Post by dualblues »

Thanks for your helpful responses nelsona,

Summary:
1) Sell the losers since capital losses won't be of much use after leaving US.
2) Sell mutual funds because you can't own them in Canada.
3) Close US non-retirement accounts.
4) Delay selling winners until it makes sense (I can benefit from no CA taxes once I am a Canadian resident).

I am in good shape with respect to 1-3, (1 mutual fund to dispose of; no capital losses due to previous harvesting). I do have about 300K in long term capital gains.

When I return to Canada, it is probably a good time to realize the capital gains. Any idea how much tax I would pay on realizing 100K of gains/year.
(assuming no appreciation in Canada, does the stepped up basis mean no Canadian taxes. For US taxes, would they be considered long term capital gains or taxed as income?)

Cheers
nelsona
Posts: 16947
Joined: Wed Oct 27, 2004 2:33 pm
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Re: Dual Citizen, future Canadian resident capital gains exposure

Post by nelsona »

The rules for US cap gains don't change once you are in Canada.
For Canada, your investments take on the new cost basis, so you will have little to pay in Canada.
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
dualblues
Posts: 23
Joined: Tue Mar 16, 2021 1:50 am

Re: Dual Citizen, future Canadian resident capital gains exposure

Post by dualblues »

Thanks for your help nelsona,
Indeed, makes sense! Since I haven't filed US taxes as Canadian resident, it's all a little "black magic" to me :)
Cheers
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