Deemed Dispotion/Departure Tax Questions

[tigerman]

Hi,

I'm sure these questions have been asked many times before so my apologies. I've been offered a position in the US and I would work under the temporary TN status. If I go, I will not have residential ties in Canada and would be taxed as a US resident. Depending on things, I would not be away from Canada for more than 3-5 years and would return.

I hadn't really thought about this before but I came across this issue of deemed disposition/departure taxes recently. I've been fortunate to have had some nice capital gains in my non-registered investments over the past 6-7 years. So, after finding out about these dispositions/taxes, I would be hit with tax on low 6 figures of capital gains. My questions are as follows:

1) I would pay capital gains tax based on the value of the investments the day I leave Canada. I technically don't have to 'sell' the investments, but CRA treats it as if I did. So when returning to Canada after a few years, what becomes of the adjusted cost base of these investments?

2) Another option is to defer the taxes and fork over a security deposit. Instead of capital gains taxes, I pay the security deposit. In this case, upon return, does anything happen to the adjusted cost base? Does it remain the original or recalibrated upon return?

3) US taxes based on citizenship and world income, I think. I realize my dividends would be taxed in the US if I keep the shares, but what about capital gains? Would the US tax me on capital appreciation when I leave, and if so, would that be based on the capital appreciation while residing in the US, or would that be based on the original adjusted cost base?

Any insights are greatly appreciated. Thank you.

[nelsona]

there is no difference in the treatment between 1 and 2. In either case you owe tax based on the departure price, and you deposit merly allows you to defer payment of that tax until you sell the investment.

However, you may be please to know that should you return to Canada, you can choose to "undo" the deemed disposition, and treat that investment as if you never left.

This *MIGHT* be a god idea,. However remember that if you do keep the deemed disposition, when you return, the the gains made while you were away are not taxed.

So, let's say you bought ABC at $100 and wne you leave it is $1000. When you return to Canada it is $2000.

So, when you leve you ow gains tax on $900, whether you choose to pay it then or not.
If you come back and unwind the deemed disposition (you get you tax or deposit bac), your cost basis returns to $100 and you will eventually owe on $1900 plus any future growth.

If you keep the disposition as is, (paid or not), your new cosy basis becomes the arrival value of $2000, and you have avoided Cdn tax on $1000 of gains while you were out-of-country.

You can decide this on an investment by investment basis when returning, but only on investments you had when you left, and still have when you return.

[tigerman]

Thanks for clarifying. Either way you pay, but there are little nuances from a taxation perspective.

[nelsona]

Yes. The principle behind deemed disposition when leaving Canada is that you need to pay tax on gains that were made while resident in Canada at some point.

[cleavers]

Apologies for piggy backing on this thread - have searched the forum, couldn't find my specific issue and this seemed to be closest.

I moved from CAN to US in Feb 2015. I did a deemed disposition of (US$) shares which I owned at the time, paid tax on the capital gains. In 2016 (as US resident & green card holder), I sold some of those same shares. For 2016, should I then only be paying tax on the difference between what FMV was at time of Canadian departure and price at which I sold them? If so, how do I report that accurately on my US tax return? I've got the 1099 forms from my broker but obviously they only show cost of shares at time of purchase and gains made after selling and if I use that information, I believe will end up paying tax twice on a portion of the gains.

Thank you in advance and apologies if this is in the wrong place.

M

[nelsona]

Search for RP 10-19 on this forum

[cleavers]

Thank you! I have done further research based on your response, and looks as though I have to file form 8833 along with my tax return. In looking at the tax treaty documentation, I believe my situation (sale of shares in US that were previously 'deemed disposed' in Canada) this would fall under Article XIII relating to gains - is this correct?

Thanks again.

[nelsona]

That is why I pointed you to RP 10-19. Read that document and proceed accordingly.