Canada departure tax -> step-up basis in US question

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totality6666
Posts: 16
Joined: Sat Nov 18, 2017 6:39 pm

Canada departure tax -> step-up basis in US question

Post by totality6666 »

Hi,

I have moved to the US to work and severed all ties to Canada except for savings accounts/GICs (hence became non-resident). However, I liquidated my margin account only 2 months after entering the US, which means that I will have to pay departure tax on the assets on my last Canadian return, AND pay capital gains on my first 1040 US return.

Using the tax treaty, I will step-up the cost basis of my stocks at the time of entering the US to avoid double taxation.

I had held those stocks for more than 1 year before selling them. However, they were only held 2 months after the deemed disposition at the time of entering the US.

My question is the following:

Do I have to pay short-term or long-term capital gains on the 2 months accrual on my US return ?

Thanks
nelsona
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Post by nelsona »

It will be long-term gains.

There is an IRS Rev. Procedure 2010-19 that you need to follow.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
totality6666
Posts: 16
Joined: Sat Nov 18, 2017 6:39 pm

Post by totality6666 »

Thank you, very helpful. I just found this forum and it is a gem.

I have a follow-up question, if you are willing to answer.

I have approximately 100K CAD that I would like to convert to USD to invest in my US brokerage account. I found a broker willing to do the trade at very low cost, so no worries about this.

Assuming that I have earned those CAD dollars over the 2017 tax year (with Canada salary & investments), I could use the LIFO method and use the average 2017 YTD FX rate to calculate a USD cost-basis for those CAD. Then, when I convert to USD at the spot rate, that would realize a FX trade & hence generate taxable FX gain/losses. According to my calculation, the gain would be approximately 1200 USD, which is over the 200$ reporting threshold.

My question is: Can I split this this 100K CAD trade into 10 x 10K trades to avoid the 200 USD reporting treshold, or is this non-advisable as it could be considered tax evasion ?

Thanks !
nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

I have no problem with this.

EXCEPT, using LIFO or FIFO but then claiming the average exchange rate is contradictory.
if you are going to use anything other than average cost basis, then you shouldn't use an average price.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
totality6666
Posts: 16
Joined: Sat Nov 18, 2017 6:39 pm

Post by totality6666 »

nelsona, here is a follow-up question :

- I sold my stocks 2 months after entering the US
- However, I decided to file 1040NR as it's more advantageous for me for various reasons.

I read that non-US related capital gains are not taxable on 1040NR... but where do I pay those capital gains ? It seems like I should not pay them to Canada since I will already pay them my departure tax and should not owe anything after leaving...

So, who gets my capital gains tax ?
nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
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Post by nelsona »

There is a space to report cap gains on 1040NR for a reason. You left Canada, so can't consider those post-departure gains as Cdn sourced, so they need to be reported on your 1040NR, at the 30% taxrate.

So, it may not be so advantageous after all.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
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Post by nelsona »

I must stress that you would report gains that are from US sources. If your accounts are not in US (and are not US stocks), you should be fine excluding these from the 1040NR.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
totality6666
Posts: 16
Joined: Sat Nov 18, 2017 6:39 pm

Post by totality6666 »

That's kinda interesting... those Canadian securities (broad market ETFs) were in my (still open at the time) Canadian broker account in Canadian dollars when I sold (after leaving & cutting all significant ties). Hence, they are not US sourced and need no 1040NR reporting ?

This sounds like a loophole but OK - thanks !
nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Well it is an important loophole.

When you leave US, you won't have this loophole, because your investments will be with a US brokerage. You will have to wait until you establish Cdn ties, not merely break US ones.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
totality6666
Posts: 16
Joined: Sat Nov 18, 2017 6:39 pm

Post by totality6666 »

Yup I knew about this one (US -> Canada), thanks for reminding.
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