Canada Exit Tax / Deemed Disposition Question (Cap Loss)

[mattybear87]

Hi all,

I have a quick scenario I'd like help with determining the tax implications.

I am a Canadian and was granted a TN VISA to work in the US for three years on Jan 7, 2013. I intend on staying here for that entire time.

At my date of departure I had stock valued at $1.00 per share. My understanding is that I am deemed to have disposed that stock on Jan 7, 2013. In doing so, I would lock in a capital gain to report to the CRA.

However, I sold the stock in February (living in the US) for $0.85 (after the Jan 7 deemed disposition date).

Since I was deemed to have sold my stock at $1.00, this would make the new cost base for US tax $1.00, correct?

Therefore, if I sold the stock at $0.85 in the US, how would I report that for US tax reporting purposes? As a capital loss? Or would it not need to be reported since it is not a gain relative to the new cost base?

I look forward to hearing from you.

Thanks!

[nelsona]

Ordinarily, the US does not recognize the deemed disposition cost of an investment when determining cap gain/loss, thus, the cost basis would be the same as the one you use to determine your deemed cap gain/loss in Canada. The only caveat is that any cost basis calculation must be done in USD valuated at the various times that you bought or were diestributed shares of this investment.

There is a treaty provision which allows Cdns who have a deemed disposition to use the deemed disposition price and the new cost basis.

So, in this specific case, you would want to use this. You would want to take the deemed dispo as the new basis , since it is higher, and declare a cap loss.

There is a rev proc that explains how to do this:

http://garygauvin.com/WebDocs/IRS/rp-10-19.pdf

So, follow the rev proc and you will be able to use the deemed disposition price as your cost basis. You ened to fill out the form for Cdn departure tax retunranywys (due in april 2014), so this should be a simple matter for the Rev Proc. This election has 2 advantages. One is the lower cap gains or higher cap loss that is generated, but also not to be over looked is how much it simplifies your US cost basis calculation, since you don't have to worry about historical US exchange rates and distributions and reinvestents, etc. Your cost basis is the CAD price on Jan 7, times the US exchage rate for that day.

The one thing I'll mention here though is that the provision to use deemed disposition price, if you choose to do this, MUST be applied to all your investments (ie, every item on your CRA T1243 form), and if the result of all your deemed diposition is a loss, you cannot use this provision (which, in the end, you would not want to anyways).

[mattybear87]

Thank you for your thorough response.

So, just to clarify, the particular stock was my only holding, therefore, I would be able to use the provision - which would trigger a gain in Canada upon departure. By using the provision you've described, my cost base in the US would be my deemed disposition price as at Jan, my date of departure form Canada? Since I sold the stock for less than that price after Jan 7, I'd be able to report a capital loss in the US?

Cheers

[nelsona]

Using the provision isn't what triggers a gain in canada. It is simply moving from canada automatically trigger deemed disposition. it is not a choice.

What is a choice is to use the treaty provision to reduce your US capital gain.

[mattybear87]

Nelsona, do you have a sense if the same would apply in the state of California? I.E. am I still able to use the new cost base upon entering the US to trigger the mechanism you have described about. I have heard that certain Canada tax treaties are not valid there?

[mattybear87]

I guess to add to that, if California were to not honor a treaty like you've described, is it ever possible to have a different cost basis for the federal piece (the deemed departure cost basis) and use the actual cost basis for the state piece?

I guess I'll let you answer the question about this treaty being valid in California in the first place before I get too carried away...

[nelsona]

California has a whole bunch of exceptions and additions, so a different basis shouldn't phase them. But I would not expect that Cali would want a different basis that what you show on your 1040 schedule D (after applying the treaty).