CA -> US Move: Deemed Disposition Taxes & Full Year Residency

[procavia]

Hi all,

I expect to move from Canada to the US next year. I have a non-registered account with capital gains. In my moving year, I expect to have zero income for the Canadian part, and relatively high income for the American part.

I understand that normally when moving I would be considered a part-year tax resident for Canada and similarly dual-status for the US. I would have a deemed disposition of my non-registered account by Canada upon changing residency and a corresponding step-up in cost basis by the US assuming I file the election. This means my capital gains would be taxed by Canada but not by the US, and at a low rate in Canada since I have no other income. The US would never tax me on these past gains.

However, being dual-status in the US that year means I can't use the standard deduction. I was considering electing to be treated as a full-year resident by the US to get the standard deduction, and since I have no Canadian income this wouldn't change my tax bracket. However, how would this work for the deemed disposition then? Canada would still treat it the same I believe, but how would the US treat the assets then?

Thanks! :)

[nelsona]

This would have no impact on the how the deemed disposition would be treated in future, you would still follow the process set out in section 4.02 of Rev Proc 2010-19, since you are not a US citizen at the time of your move, and the investments subject to deemed disposition would not otherwise be taxed in US. Your cost basis for any future sales would be based on the deemed disposition price.

If you were a US citizen, or if some of your investments would be taxable in US in any event (like US real estate). this would bring in the more complex aspect of section 4.01 of the Rev Proc.

Note that if you actually sell some investments between Jan 01, and your move date, you will need to report these on both returns

[procavia]

Section 4.02 says:

the rules in this section 4.02 apply to a Canadian emigrant’s property that was
subject to Canadian departure tax under Canada’s deemed disposition rules but with
respect to which a disposition immediately before the individual’s change of residence
would not have been subject to U.S. federal income tax.

The last part seems to mean that this only applies if selling the stocks before moving wouldn't have been taxable by the US. However, with full-year residency, this wouldn't be the case, since I would be a US resident immediately before the deemed disposition and a real disposition would trigger the US's worldwide tax.

Am I interpreting this wrong, or is there something else?

[nelsona]

The key here, in my opinion, is that section 4.01 refers to property which "would have been subject to tax by the United States in accordance with the Treaty", and then lists essentially US-based property such as real estate, US-based business, and special rules for former long-time US residents. US citizens do not get to exclude these from US taxation when living in Canada, but everything else is "according to the treaty".

Since it appears that none of these apply to you, go with 4.01.

[nelsona]

Sorry, meant go with the procedure outlined in 4.02

[olivew211]

When becoming a resident of the United States it is possible that your deemed disposition and your choice of residency will have massive influence on the decision-making process of the taxation. It would be wise to talk to a tax professional who is familiar equally with the US and Canadian tax systems to avoid unfavorable taxation of your income.