Capital Gains tax on US Citizen-Canada Residents who return

[bamatexan]

I am a US citizen who is retired, and live off investment income alone.
I am contemplating a move to Canada, subjecting myself to dual filing requirements.
I may or may not eventually choose to work in Canada.
I would be applying for dual citizenship, using a Spousal Sponsorship by a Canadian spouse.
Would I be able to keep my existing brokerage accounts in the US once I relocate to Canada?
I read on your site about Canada imposing capital gains taxes on the increased value of capital assets held during residency in Canada. Does this capital gains tax apply to increased values of US stocks and bonds that were owned before establishing residency in Canada? I am concerned that should my relationship in Canada come to an end, and I elect to return to the US and give up Canadian Residency, I will have to liquidate assets I would not otherwise choose to liquidate, in order to satisfy a Canadian capital gains tax.
I assume income on such investments would be taxed by Canada and also reportable to the US, and I would get tax relief in the US for taxes paid to Canada?

[nelsona]

1. It is best not to have a US brokerage (non-retirement funds) while living in canada, as trading with this brokwer would no doubt violate your province's exchange regs (as would a Cdn living in your current state with a Cdn barokerage account).

2. When you arrive in canada, your investments are given new cost bases for Cdn tax purposes based on their value on the date you arrive in canada. This iknown as deemed acquisition upon arrival in canada. So, for the most part, your Cdn tax liability on selling stocks you held while in US will be far less that the US tax liability.

If you should leave canada, any investments you hold at that time will undergo a similar treament as wehn you entered: deemed disposition on emigrating from canada. The effect will be to tax you in canada on the gains you make while residnet in canada, and no more.

There are mechanisms that will get you credit on your 1040 for any Cdn tax you pay on this and any other Cdn income you earn.

Tip: it is generally a good idea to sell any 'losing' positions you have before entering canada, as selling these afterwards may result in a gain on one side of the boder and a loss on the other, which will result in a mismatch of tax credits.

Also, be aware that canada only uses avearge cost basis for calculating cap gains/losses. There is no option for fifo of lifo of specific sales.

[nelsona]

1 (con't). It is very simple to transfer stocks to a Cdn broker once you are in Canada. Mutuial funds would have to be held in US until sold.

2(con't). Where deemed disposition results in a tax liability, the CRA allows one to post security until such time as the investments are sold, or the tax liability is otherwise paid, so you should not have to actually sell off investments in order to cover the tax.

[bamatexan]

Thanks for the insights, nelsona.

Would the capital gains tax liability also extend to partnership interests and real estate holdings that I would leave behind in the US? Would my income from those holdings also be subject to Canadian tax while I am a Canadian Resident?

I have significant holdings in my brokerage account (which is in the name of a Trust), and my Estate Plan leaves a significant portion of those holdings to charity, avoiding US tax on capital gains accumulated at my death. If I am following you correctly, moving into and back out of Canada would trigger a capital gains obligation I might have otherwise avoided. Correct?

[nelsona]

You could look into setting up a non-resident trust (with respect to canada) to shield your foreign earnings for 5 years while in canada.

Canada has similar rules to US for gifts upon death.

Otherwise, yes, without taking positive steps, like setting up a trust -- or dying -- you would be incurring Cdn tax that you may not otherwise have had to pay.

[sxc234]

Need a further example to help with my situation.

Bought stock XYZ while resident of US on Jan 1, 2009 at $1.00.

Moved to Canada and became resident on June 1, 2009 but kept stock. Stock price was at $0.50.

On Oct 1, 2009 (resident of Canada) sold stock at $0.75.

I would file in the US a loss of $0.25/share or $0.50 a share? Going with this logic, what if I had a stock I never sold even after moving to Canada, can I claim the loss, even if I still hold it, on my US tax return?

I would file in Canada a gain of $0.25/share, I think this is pretty clear.

Thanks.

[nelsona]

Are you a US citizen? If not, you don't even report the sale in US, unless you file 1040 for that year.

But to answer your specific question, the cost basis doesn't change for IRS purposes when you move to Canada.

[sxc234]

I moved last year from US to Canada and will be filing a 1040 including a FEIE. Just trying to figure out how to treat my stock holdings. Two specific holdings are in question, one I purchased while living in US and sold after I moved to Canada and another I purchased while in the US but still holding and haven't sold yet.

[bamatexan]

As I understand the Departure Tax, it is based on capital gains earned during the period one is a Canadian Resident, whether those gains are realized or not. When moving into Canada, existing assets are valued, for the purpose of setting the baseline against which the value upon departure would be measured for purposes of determining the capital gain for Canadian tax purposes.

When establishing the values for existing assets held when entering Canada, is one's historical cost basis a "floor" for that valuation, or does the historical cost basis matter?

I currently have assets that have significantly declined in value below my cost. If the cost basis does not serve as a floor, and the asset appreciates during the period of Canadian residency but still does not reach the cost basis, I could end up paying capital gains taxes upon departure from Canada, without the guarantee of ever earning any gain on the asset at all.

[nelsona]

"When establishing the values for existing assets held when entering Canada, is one's historical cost basis a "floor" for that valuation, or does the historical cost basis matter? "

No. It is NOT a floor. it is not optional to choose the real cost. You MUST use arrival value. And you must use the value at departure, so your situation is quite liklley.

You should sell losers before moving to Canada.

[bamatexan]

One last question... the asset to which this applies more than any other is currently my primary residence. If I were to move to Canada, I would convert that residence to a rental property.

The departure tax would apply to this piece of real estate, or no?

[nelsona]

Let's be clear. The is arrival and departure disposition in canada. So, yes, any thing you hold before and after you leave Canada is subject to both.

Unless you buy a house in Canada however, you are allowed, if you do not rent out your US house to declare this as your primary residence throughoiut your time in canada. But if, like you say, you will rent it, it can't be excluded from your deemed dipsosition when you leave.