IRS Treatment of Shares in a Private Company

[xborderman]

Hi All,

I`m hoping that someone can provide some guidance on my situation as I`m about to move to the US on a green card. I do not plan to be a permanent US resident; my American spouse and daughter will return with my to Canada in a few years.

My question relates to my owning my own company registered in Ontario. I am the sole shareholder. I am wondering how IRS would view and tax the Canadian company and its assets once I am in the US. From CRA’s perspective, I’ve understood that the shares I own in a Canadian company will not be “taxable Canadian propertyâ€￾ subject to a deemed disposition because they do not meet the CRA requirements for that (i.e., they are non-traded and less than 50% of the value is from “real or immovable propertyâ€￾, forestry, etc.). All of the value of the shares is from the cash held by the company, and a CRA agent said that doesn’t count as “real or immovable propertyâ€￾. So I’ll be fine when I leave Canada. However, I’m unsure whether the IRS would want to tax my assets in the company, such as upon my eventual exit from the US. I would strongly prefer not to have to distribute the company’s cash to me before moving to the US, given the tax I’d have to pay in Canada if I did so.

Anyone guidance would be greatly appreciated!

[nelsona]

First, let's be careful about TCP and deemed disposition.

My understanding is that if your shares are NOT considered TCP (yours appear not to be, according to the new definitions) then they ARE subject to deemed disposition.

Are you sure about your statement?

[xborderman]

Hi Nelsona,

Excellent observation - you are correct. CRA's first advice I received was contradicted by a subsequent agent (and tax specialist), who said I will have to file a deemed disposition. They say the value of the shares is something that I have to propose and they cannot provide guidance on it. As a consulting company in which I'm the only employee, I don't see any value upon sale to someone else. What I cannot determine is whether the retained earnings in the company, for which I've already paid corporate tax, would contribute to the share value. In that case, it would seem that I would be posting a security against money that I've already paid corporate income tax on. Does this make sense? The follow-up query is whether you're aware of the types of security that CRA typically accepts.

Any guidance would be appreciated!



[quote="nelsona"]First, let's be careful about TCP and deemed disposition.

My understanding is that if your shares are NOT considered TCP (yours appear not to be, according to the new definitions) then they ARE subject to deemed disposition.

Are you sure about your statement?[/quote]

[nelsona]

Biggest lesson learned. Never call CRA telephlunkies for anything but sending you a copy of a form.
Sounds like you have a pro working with you, ask him for further guidance.

Usually the shares themselves are the security.
Sounds more like a wind-down is in order.