Cost basis of investments when moving to Canada...?

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markitzero
Posts: 14
Joined: Sat Dec 22, 2012 11:11 pm

Cost basis of investments when moving to Canada...?

Post by markitzero »

Something my accountant told me (and seems corroborated by reading I've done online) seems like a good opportunity given my life situation, but I want to ensure I'm understanding properly: If a country from which I'm emigrating back to Canada has no 'departure tax', then the cost basis for my stock holdings is deemed to be their fair value on the date of my emigration to Canada, is that correct?

If so, then consider this set of facts:
- I'm a tax resident of Canada and buy $10,000 of MSFT
- I then move to the US and become a US tax resident, at which time my MSFT stock is worth $15,000, so I have to pay the CRA tax on the $5,000 appreciation that is deemed disposed of. The CRA now considers my cost basis to be $15,000 (and I file the form with the IRS to claim the 'stepped-up' $15K cost basis for US purposes too.)
- I stay in the US for 3 years and then move back to Canada when my MSFT stock is worth $23,000. There is no departure tax in the US, so I don't have to pay them tax on the $8,000 appreciation, so far so good.

HOWEVER, I want to know what the cost basis is for my MSFT stock if I decide to sell it now that I'm a Canadian tax resident. My accountant told me that the CRA considers the cost basis to be $23,000 -- the market value on the date of my re-immigration to Canada(!) What, then, becomes of the $8,000 appreciation that occurred while I was in the US? Is it simply not taxable?
nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

The process is well-known, and does not apply only to items you had before leaving canada.

But just to correct a few things:

After you pay deemed disposition tax upon departure from canada, CRA doesn't consider anything about that particular investment, so it doesn't hav a cost basis. period. IRS, if you elect to do so, will accept your demmed disposition price as the new cost basis, as you said, by filing a statement under IRS rev proc 10-19

When you return to canada, everything you have gets a new cost basis, the old MSFT shares as well as anything else you may have bought since moving. Its called deemed acquisition upon arrival in Canada.

What it means is that you don't sell "winners" until after you leave US (year following move to be safe). That means all your US resident gains are tax-free.
You sell all losers before leaving too, for 2 readons, as illustrated below:
First, to get the capital loss in US, you need to sell while resident in US. second, A share you bought at $10 in US (or brought down to canada) which is valued at $8 when you move back, will still have a gain of $1 if you sell it at $9 later.

btw, just for completenes: If in your example, during the time you were in US your MSFT shares fell in value to, say, $11000, you can elect to have the whole deemed disposition swept away, have your exit tax refunded to you, and revert to the old $10,000 cost basis.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
markitzero
Posts: 14
Joined: Sat Dec 22, 2012 11:11 pm

Post by markitzero »

Thanks for reply. Wow, one of the few areas where tax law seems to favor the individual if -- for individuals in my situation where I left and then returned to Canada -- I get to keep any gains (while i was in the US) tax-free, but get to undo the DD if a stock falls.

Seems like a remarkable opportunity. Certainly there must be some very wealthy Americans who would consider emigrating for this reason alone, no? If I'm an American with $10M in unrealized stock gains, why wouldn't I look for an opportunity to go work in Canada for a year, then sell my stocks a week after establishing Canadian tax residency to realize the $10M in gains essentially tax-free?

Oh, why the "year following move to be safe"? What difference would waiting a year make...?
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

American citizens (and green card holders) do NOT get this benefit, as they are always taxable in US on world income. It is solely available to those who are US taxpayers on a temporarily status. Your scenario would not work for an American.

The reason you may wish to wait until the calendar year after you move, is that when you move to/from US you have choices on how to file your taxes for that year, and it may be beneficial for you to file as if you were in US the entire year of arrival or departure. If this were the case, you would need to include any gains incurred after physically leaving US, but in the same year. So you would ait the few months to sell after jan 01.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
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