Canadian residents who emigrate from Canada are generally deemed to have disposed of their capital property equal to the fair market value on the date of emigration, with any resulting gain or loss subject to Canadian tax (“Departure Tax”).
For Canadians emigrating to the United States, the Departure Tax creates a potential double tax issue since the US taxes the same gain only upon an actual disposition of the property, when foreign tax credits for the Canadian tax paid on the earlier deemed disposition may not be available.
To prevent double taxation of pre-migration gains, you can make an election, for US tax purposes, under the United States-Canada tax treaty to have disposed of and reacquired your property at the time of changing residence. By making the election, you will take a stepped up basis in the property equal to the fair market value of the property on the date of the deemed disposition, which means that you will only be taxed in the United States on any post-emigration gain.
For example, Paula, an emigrant from Canada to the US, owns shares that cost $100 and are worth $1,000. When Paula emigrates, Canada treats her as having sold the shares for $1,000, realizing a $900 capital gain ($450 taxable capital gain). Paula can choose to be treated for US tax purposes as having realized that $900 gain before becoming resident in the U.S. If she does, then the US may tax any future gain over the $1,000 value of the shares, but it will not tax any of the gain that accrued while she was resident in Canada.
At Gedeon Law & CPA, we assist Canadians immigrating to the United States with making the required treaty elections to minimize US taxes on appreciated capital property.
