Capital Gains/Losses moving back to Canada from the U.S.

IHateTaxes · Post by **IHateTaxes** » Fri Mar 30, 2012 6:24 pm

I think I understand what I am supposed to do after reading several other threads in this forum, some dating way back to 2007. I tried to piece together all the advice (mostly given by nelsona â€” many thanks) to address the following issue of mine:

I worked and resided in the U.S. until mid-April 2011, at which point I moved back to Canada. I've had a brokerage account in the U.S. all this time, and have sold stocks both before and after the mid-April Canadian arrival date.

What I learned (and someone please correct me if any of this is wrong):
- I should close my U.S. brokerage account and move everything to Canada (since trading over this brokerage account is "skirting the law")
- I should report no capital gains/losses on my 1040NR (US return).
- I should report all capital gains/losses on my Schedule 3 (CDN return), with the following rules applied for determining the cost basis:
1. If sold after the mid-April arrival date, cost basis is the value of the shares on the mid-April arrival date (at the market open or at the market close?), as if I sold and re-bought all my shares on that date.
2. If sold before the mid-April arrival date, cost basis is unchanged: it is as if I were living in Canada the time I acquired the shares in the U.S.

This is what I understand after several hours of research. Can someone confirm (who is/was possibly in the same boat) that this is the correct approach for reporting my capital gains/losses?

(P.S., I also received a 1042-S from the US brokerage with an income code 09, a report of capital gains. I have no idea how they calculated the gross income amount on this form, so I am going to ignore it and use my own calculations on my Schedule 3 return).

(P.P.S., I received a 1099-INT from a US bank with no income tax withheld. I think I was supposed to receive a 1042-S instead. I called the bank, and it turns out they didn't process my W-8BEN. I think I'm now supposed to report this 1099-INT on my 1040NR as taxable interest, and go through the same steps for claiming the foreign tax credits on my Canadian return. In other words, I will have to take similar steps with the income reported on my 1040NR for the W-2 form I received from my former US employer).

I'm going to keep researching, but in the meantime I'm hoping someone can verify what I've discovered so far. All these documents and forum threads about tax treaties, foreign tax credits, etc. have left me very confused (and with a huge headache) and I'm really hoping to sort this all out correctly.

nelsona · Post by **nelsona** » Fri Mar 30, 2012 7:57 pm

1. Correct. get rid of account
2. Incorrect. You are dual status for 2011, this the first part of the year you must report what was sold in US on a 1040; 1040NR will only cover the last part of year.
3.Incorrect. You only report what you sold after returning to Canada. with cost basis of day you arrived in canada.

You need to split your year into 2 parts. world income to US for first part, world income to canada for second part.

Your research is over.

IHateTaxes · Post by **IHateTaxes** » Fri Mar 30, 2012 8:15 pm

You are awesome. Thanks.

Your answer sorts out how I should treat my capital gains/losses for 2011. But this implies I might have reported the other types of income incorrectly. Do I also partition the other forms of income? That is, on my Canadian T1 return (and likewise my 1040NR), only report income after my mid-April arrival? That is, very specifically:

1040 US: Report income from W-2, capital gains/losses from shares sold before mid-April

1040NR US: Report interest from 1099-INT, and dividends collected after mid-April

T1 Canada: Report same dividends and interest collected after mid-April (but DO NOT report income from W-2)

Note: I am a Canadian citizen, if that matters. No green card.

With the introduction of the 1040, I almost see the 1040NR being a redundancy now, which makes me think I'm still doing this wrong.

nelsona · Post by **nelsona** » Fri Mar 30, 2012 9:31 pm

bank interst is not taxable for non-residents of US, you only report interst from before april in US, after april only in canada.

It is your 1040 that is redundant. You report pre-april income on it, but then transfer the amounts to your 1040NR, along with any post-departure dividends (flat taxedat 15% on NEI portion of 1040NR.

By the way, most people leaving US just fiel a full year 1040, reporting all income, and then take tax credits for the Cdn tax they owed on US source income. works out simpler and cheaper.

IHateTaxes · Post by **IHateTaxes** » Sat Mar 31, 2012 2:15 am

I think I got it figured out now. The wording and examples in Pub 519 make a lot more sense after your explanation.

Thanks so much.

saras · Post by **saras** » Mon Apr 02, 2012 3:57 am

Hello,
I moved from USA to Canada in 2007. At that time I had some stocks that I purchased from the company I was working in ( in USA). I did not know I had to sell them. I Just sold them last year and want to file my income tax. I am working in Canada and so is my husband. We are residents of Canada. Is this what I am supposed to do ? My cost price in 2001 was around 3000 and I sold it for around 6000. So, my gains are around 3000.

1. File capital gains in Canada for this year jointly with my husband, but consider the gains as the amount of difference between the cost on the date I arrived in Canada (say July of 2007) and the selling price. For instance, if the cost on July 2007 was 2000, then my gain is 4000 ?
2. I got a 1099 form from USA but no tax was withheld. So, I do not file any income in USA due to the treaty OR Do I still have to file 1040NR-EZ and give the treaty code in form in form 8840 ? if so, what is the tax treaty code I need to give in 8840 ?
3. I will pay tax in Canada at whatever my marginal rate is ( in our joint filing) and I will not be paying 50% tax on my gain ?

I am looking forward to your reply. This is what I understood from your previous conversations. In Table 1 of p591 for Canada, none of the titles say anything about capital gains or rate on them.

Saras

nelsona · Post by **nelsona** » Mon Apr 02, 2012 12:09 pm

Once you moved TO canada, your basis for Cdn tax becomes the FMV when you arrived.

For US, assuming you are a US taxpayer, then it remains the original cost basis. You should be filing a US return every year if you are US citizens.

saras · Post by **saras** » Mon Apr 02, 2012 12:23 pm

Thank you. I am not a US citizen and do not have a green card. Since no tax was deducted, should I still file a return. I am thinking that I only have to file a return in Canada now.

nelsona · Post by **nelsona** » Mon Apr 02, 2012 12:29 pm

No. You are not required to report this to income. Dividends must be reported on 1040NR (since the proper withholding has not been made), but not cap gains.
Another reason why you should NOT have a US brokerage account when living in canada!

saras · Post by **saras** » Mon Apr 02, 2012 1:20 pm

Thank you so much for your help. I did not know these rules. I will close my account now to avoid future problems. Thanks

Since you are differentiating between dividend income and capital gains, I suppose I am required to report this to the Canada income tax ( my capital gains from this sale)

Saras

saras · Post by **saras** » Mon Apr 02, 2012 1:27 pm

I think now I understand this from the previous discussion. Thank you.

1. I should not hold any brokerage account in USA while living in Canada. I must close it immediately.
2. Any stock sold from this account in USA after I moved to Canada is taxed as capital gains based on the price I sold if for - minus the price on the day I arrived in Canada. ( since 2007 this is the only sale I made and this is the only stock I have since I worked in that company)

Once again Thanks for all the clarifications.

Saras

saras · Post by **saras** » Mon Apr 02, 2012 1:42 pm

Hello,
I need to clarify one more thing. My relative worked in USA in 1983 and paid into the Valic retirement fund and left USA in 1985. Now he is retired and last year he withdrew half his money ( around 14000$) but they withheld 30% tax on it. Since it is pension fund, the Table 1 on p951 says 0% tax on it. Can he get all this 30% back if he files a return ? he is an Indian Citizen and is living in India now. If he files a 8840 form would they refrain from deducting anymore tax in the remaining amounts in future ? Thanks

nelsona · Post by **nelsona** » Mon Apr 02, 2012 2:01 pm

No. I don't know what p951 is, but Indian should not be subject to tax on pension income.

If you meant Pub 901. Then table 1 says pensions are taxed at 0%, which is what I just said. You need to read the table correctly.

The question then becomes, why the fund company did not know this?

8840 is not the form to file. 1040NR will correct last year. W-8BEN, sent to the pension fund will fix future.

Sounds like he had a spoof address somewhere.

saras · Post by **saras** » Mon Apr 02, 2012 2:21 pm

Yes, it is pub. 901. ( sorry, my error in quoting it).

I am not sure what you mean by spoof address. I assume you meant he must have had a USA address on file. But he updated it to Indian address when he withdrew the money (which was sent to his Indian address ) and he also filled in the W4 form as they had asked him to. I think it is because of the W4 form they had withheld tax, since it is for employee withholding allowance. They should have asked him to send a W-8ben form, since he was not residing in USA now. When we asked earlier they said they will deduct tax anyway and we have to take care of the tax later. They were not prepared to discuss it.

I think he can fix it now, as you said, by filing a 1040 NR for last year and file a W-8Ben for future withdrawals.

Once again, thank you for your advice.

Saras

nelsona · Post by **nelsona** » Mon Apr 02, 2012 2:57 pm

Yes. He should not have had a W-4 on file. W-8BEN is the answer.