Deemed Disposition Timing And Tax

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elgoog
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Joined: Thu Sep 19, 2019 9:40 pm

Deemed Disposition Timing And Tax

Post by elgoog »

Hi,

I am a Canadian citizen that will be moving to the US soon and will become a US tax resident sometime next year. I was curious about how deemed disposition works


1. For the date, the CRA mentions in https://www.canada.ca/en/revenue-agency ... s.html#ddc:

When do you become a non-resident?

When you leave Canada to settle in another country, you usually become a non-resident for income tax purposes on the latest of:

1. The date you leave Canada
2. The date your spouse or common-law partner and/or dependants leave Canada
3. The date you become a resident of the country you settle in

In my case, I and my spouse will both leave for the US this year but won't be US residents until next year. So, what should the date be?

2. Do you pay federal + state tax on any gains for deemed dispositions or just federal tax?

3. I have heard that the treaty lets you adjust your cost basis so when I actually sell my securities, the IRS won't double tax me. Where can I find this information?

4. What would be the best strategy to minimize the amount of departure tax? It seems like it's only charged for the part of the year you are a resident.

Thank you.
nelsona
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Re: Deemed Disposition Timing And Tax

Post by nelsona »

Because of the treaty, those who move to US are generally considered to be non-resident on their move date. This avoids having to report US-source income earned after departure. So forget picking a date: It is the day you leave canada.

Deemed disposition is a Canada only concept. You pay nothing in US as a result of that. You also benefit later from not having to pay US tax on any any made after the deemed disposition. IRS Rev Proc 2010-19 has the details.

You can't minimize the gains resulting from deemed disposition. You can minimize the tax by lowering you income in the year you move, but it is Canada's way of getting their share of the gains you made while resident.

There is a LONG term way to eliminate the tax: If you use your investments as security on the deemed dispo tax, and then hold on to those investments for 10 years, CRA has to forgive the tax by treaty.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
elgoog
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Re: Deemed Disposition Timing And Tax

Post by elgoog »

Thanks, nelsona. Basic question: how do you use your investments as security? Do you just keep them in your account and promise the CRA that you won't sell them?
nelsona
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Re: Deemed Disposition Timing And Tax

Post by nelsona »

Yes. When you sell them, you then remit the tax related to that item.
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nelsona
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Re: Deemed Disposition Timing And Tax

Post by nelsona »

It would be in aa differnt account, since you cannot keep a Cdn brokergae account while in US.
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elgoog
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Re: Deemed Disposition Timing And Tax

Post by elgoog »

Thanks Nelsona. All my investments are RSUs received as compensation and are in US brokerages (with a W8-BEN). My federal tax owing on these investments is most likely going to be over $16,500. Do you know what would be my options in that case? Do I have to provide some cash as security?
elgoog
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Joined: Thu Sep 19, 2019 9:40 pm

Re: Deemed Disposition Timing And Tax

Post by elgoog »

To clarify, I meant to say my federal tax owing to the capital gain from these investments is going to be over $16,500.
nelsona
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Re: Deemed Disposition Timing And Tax

Post by nelsona »

Why would you provide cash as security? Then you might as well pay the tax.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
elgoog
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Re: Deemed Disposition Timing And Tax

Post by elgoog »

Thank you Nelsona for the information on the Rev Proc 2010 - 2019. For me, my employer is currently in the US and I am paying FICA taxes in the US.

When I move to the US from Canada in October, would I still be able to use Rev Proc 2010 - 2019 since I was subject to US tax when I emigrated from Canada?
elgoog
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Re: Deemed Disposition Timing And Tax

Post by elgoog »

I meant Rev Proc 2010 - 19 and not 2010 - 2019
nelsona
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Re: Deemed Disposition Timing And Tax

Post by nelsona »

Yes. It will be under a different paragraph of the Rev Proc.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
elgoog
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Re: Deemed Disposition Timing And Tax

Post by elgoog »

What happens in the following situation:

1. Bought stock at $60
2. Paid deemed disposition tax on capital gains of $20 since FMV on date of emigration was $80
3. (In US) Sold when stock falls to $70

How do you report this and pay tax on this?
nelsona
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Re: Deemed Disposition Timing And Tax

Post by nelsona »

you would pay tax on your CDn departure return on the $20 cap gain.

You would then get $10 cap loss to be used on your US return.
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canadiandeserter
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Re: Deemed Disposition Timing And Tax

Post by canadiandeserter »

nelsona wrote:
> There is a LONG term way to eliminate the tax: If you use your investments
> as security on the deemed dispo tax, and then hold on to those investments
> for 10 years, CRA has to forgive the tax by treaty.
Just curious, which part of the treaty enables tax to be forgiven after 10 years? And what is the process to reclaim the security from the CRA based on the treaty?
nelsona
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Re: Deemed Disposition Timing And Tax

Post by nelsona »

Article, XIII.5
Para. 4 describes why cap gains are paid by residents.
Para. 5 explains that a state can tax non-residents for a period of up to 10 years after leaving if it was subject to deferred departure tax.

If one waits the 10 years, they can no longer tax you.

You would be be released by sending a letter to CRA International with the details, and referring to this article of the treaty.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
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