US capital gains tax during change of residency

fmincon · Post by **fmincon** » Sun Oct 13, 2013 7:49 pm

If I purchase US stocks while working in the States (resident alien for tax purposes but no green card or citizenship), leave the country for good (perhaps even wait for the subsequent tax year when I would be treated as nonresident alien for tax purposes), and then sell the stocks, would I still incur US capital gains tax?

nelsona · Post by **nelsona** » Sun Oct 13, 2013 11:00 pm

Nope.
And Canada will only tax you on the gains from after your arrival.

The rule of thumb is sell losers before leaving US, and winners after.

You are correct to wait until the next calendar year, as you might wish to file a full year 1040 in your departure year.

JGCA · Post by **JGCA** » Mon Oct 14, 2013 12:42 pm

Nelsona , if he were to file a full year 1040 in the departure year then he wouyld have to include teh gain on the US stocks since he is required to show all income for the year and claim tax paid to Canada on this gain as a credit or would the gain not be included on the 1040?

nelsona · Post by **nelsona** » Mon Oct 14, 2013 1:45 pm

The gain WOULD have to be included. That is why I said (and fmincom correctly is thinking) one is best to wait until the following calendar year.

JGCA · Post by **JGCA** » Mon Oct 14, 2013 2:38 pm

So I can understand, if you are saying that he waits till the departure year ( next yr) to sell the stocks and you say he then should file a full yr 1040 this would include the cap gains, so the gains are taxed therefore, but you said NOPE they are not, I am not understanding whay he should file a full yr 1040 if its taxing him

nelsona · Post by **nelsona** » Mon Oct 14, 2013 3:31 pm

I'll make it simple:

Joe leave US sometime in 2013 and settles in Canada, with accrued capital gains, but not realized.

If he sells the investment in 2013, he can either file a dual status return (in which he would NOT report the gain, or he can file full year 1040, in which he would report the gain. So, the gains are NOT taxable in US UNLESS he CHOOSES to file a 1040 full year. This would be a decision that would have to be calculated.

If he waits until 2014, he will not have to file a 1040, thus the gains will not be reported in US. That is why the suggestion is always to wait.

I'm quite sure our poster understood this (and again, that is why he asked about subsequent years).

Hope this clears it up for you.

nelsona · Post by **nelsona** » Mon Oct 14, 2013 3:33 pm

I'll make it simple:

Joe leave US sometime in 2013 and settles in Canada, with accrued capital gains, but not realized.

If he sells the investment in 2013 (after departure from US), he can either file a dual status return (in which he would NOT report the gain, or he can file full year 1040, in which he would report the gain. So, the gains are NOT taxable in US UNLESS he CHOOSES to file a 1040 full year. This would be a decision that would have to be calculated.

If he waits until 2014, he will not have to file a 1040, thus the gains will not be reported in US. That is why the suggestion is always to wait.

I'm quite sure our poster understood this (and again, that is why he asked about subsequent years).

Hope this clears it up for you.

nelsona · Post by **nelsona** » Mon Oct 14, 2013 3:45 pm

btw, JG, this is not a new concept.

Before the acceptance of Roths by CRA in the last treaty, I for years advised those contempalting returning to Canada to do just as I just outlined above. Becuase of Canada's deemed acquisition rules, it works out to be basically tax-free growth.

JGCA · Post by **JGCA** » Mon Oct 14, 2013 3:46 pm

yes it clears it up , I did not quite uderstand the Nope part if he was filing full year or not, thanks.

bouvirc · Post by **bouvirc** » Wed Dec 04, 2013 1:34 am

[quote="nelsona"]Joe leave US sometime in 2013 and settles in Canada, with accrued capital gains, but not realized.

If he sells the investment in 2013 (after departure from US), he can either file a dual status return (in which he would NOT report the gain[/quote]

This is what I intend to do in 2014, though I have a question on the mechanics of it:

If I keep my investments in my US brokerage account (at Fidelity, if that matters) upon moving to Canada and subsequently sell them via that account, won't the broker report the gains to the IRS and thus cause a discrepancy in my US tax filing?

If I move to Canada and tell my US broker about it (eg, by filing the W8BEN form or by changing my residence address on file), will the broker have a problem due to regulations applying to Canadian residents?

Should I move my investments from Fidelity's US branch to a Canadian branch before selling them? If so, can they do an in-kind transfer, to avoid realizing the cap gains?

nelsona · Post by **nelsona** » Wed Dec 04, 2013 11:12 am

You will not be able to keep US mutual funds in a non-retirement account in US, so be prepared to sell these "soon" after leaving US.

Nor can they be transfered in kind to canada (even to Fidelity) as the mutual funds at Fidelity Canada are NOT the same as the ones at Fidelity US.

As to the W-9/W-8 issue, I'm sure they have a W-9 on file for you, so you will not be subject to withholding when you sell, and the issue of what they report to IRS and what you report on your taxes is separate. Since you will not be filing a 1040 when you do this transaction (that is the plan, right? - I'm assuming you are NOT a US citizen or Green card holder), but filing a 1040NR, they will figure it out.

So, sell your losers before leaving, and then sell your winners after leaving US, in 2015 preferably, or in 2014, if you are sure that you won't opt to file a full-year 1040 (which will depend on how late in the year you move)

bouvirc · Post by **bouvirc** » Wed Dec 04, 2013 8:45 pm

Thanks, [b]nelsona[/b]. Indeed, I am neither a USC nor a GC holder. I will be moving mid-January, so I'm pretty sure that I'll file a dual-status return (1040NR) in the US. I actually hold no mutual funds, just ETFs and some individual stocks.

So it looks like I should keep my US brokerage account, sell the losers while I'm still a US resident, move to Canada, then sell everything else, and finally figure out how to move the cash to a Canadian account and make appropriate investments there. There is no tax liability to the US from the winners sale, and the Canadian tax liability should be minimal due to the cost-basis step up implicit in the move.

nelsona · Post by **nelsona** » Thu Dec 05, 2013 9:31 am

Correct. But since you have stock and ETF's, you maight want to consider simply ttansferring these to a Cdn brokerage after you move. You would only need to track the deemed acquisition value for when you eventually sell the investments. That way you are not incurring any costs to sell and then buy new investments.

bouvirc · Post by **bouvirc** » Thu Dec 05, 2013 7:33 pm

Oh, so ETFs and stocks CAN be transferred in kind? I must re-read more carefully what you wrote upthread.

nelsona · Post by **nelsona** » Fri Dec 06, 2013 11:09 am

Yes, stocks and ETF's can be transferred. The Cdn broker would do all the legwork (to get you as a client).