Author Topic: Dual citizen, US resident - tax concerns in first year back...  (Read 934 times)

dualblues

  • 5 O'Clock Shadow
  • *
  • Posts: 4
G'day Mustachians!

Thanks for your consideration and advice.

I am dual citizen, US Resident of 20 years, returning to Canada later in 2021. I have some concerns with respect to taxes in year 1 in Canada (2021).I will use some fictitious round numbers for discussion purposes.

1) In first half of 2021, I will earn 100k stock and 100k salary from my employer. I will also realize 300k capital gains (since stocks are "implicitly" sold and basis adjusted accordingly when I relocate to Canada). That's 500k in income and I will have to give Uncle Sam his fair share. However, am I correct in assuming that this income would not be reported as part of my 2021 Canadian tax returns?  (since I was not a resident when the income was earned)

2) I am following "Best Practices" recommendations and consolidating retirement accounts and moving them to an expat friendly brokerage. This includes: doing several conversions from IRA to Roth IRA, 401k to Roth 401k. Also, roll-overs to IRA/Roth IRA. Note: conversions include pre-tax and post-tax moneys, so, I will have a US tax bill for the pre-tax portion (perhaps 20K is taxable). Provided these transactions are completed prior to establishing residency in Canada, will they affect my Canadian taxes?
(I do understand that I will have to register the Roth to CRA as a pension as per tax treaty).

Cheers

FLBiker

  • Handlebar Stache
  • *****
  • Posts: 1537
  • Age: 45
  • Location: Canada
    • Chop Wood Carry FIRE
Re: Dual citizen, US resident - tax concerns in first year back...
« Reply #1 on: March 18, 2021, 05:48:00 AM »
Important disclosure -- I am NOT a tax expert.  However, I am a US citizen and Canadian permanent resident who just moved.  I am working with a crossborder tax professional for the first year or two.

My understanding re: point 1, though, is that, while the cost basis resets for Canada, it doesn't for the US.  In other words, at that future time when I sold my taxable holdings, I might potentially owe money to the US above and beyond whatever was taxable in Canada.  In other words, I don't think I declare those taxable gains to the US when I move.

I could certainly be wrong, though, and I'm curious what other folks say.

And re: point 2, I also did some conversions (IRA to Roth IRA).  Provided it's pre-move, I don't believe it will impact your Canadian taxes.  I did it the year before, though, so my situation is slightly different.  And with a Roth IRA, you want to declare it to the CRA when you file your first year's taxes so that it is recognized.

dualblues

  • 5 O'Clock Shadow
  • *
  • Posts: 4
Re: Dual citizen, US resident - tax concerns in first year back...
« Reply #2 on: March 21, 2021, 01:11:58 AM »
Thanks for awesome advice FLBiker,

I did some more research and reading and I think your response is correct. The change of residence causes the basis to be reset for Canadian tax purposes (the US basis stays the same). The change in basis itself is not a taxable event. It is only book-keeping until you sell the asset (which is important since it allows you to sell strategically to minimize taxes).

Here are some other findings that may be useful to US persons returning to Canada with respect to non-retirement assets. Please let me know if there are errors or omissions:
i) You should close your US non-retirement accounts.
ii) You can move your US brokerage assets (stocks, bonds, ETFs) to Canada without selling them. This is important since selling them would be a taxable event. You cannot move all holdings (eg. US mutual funds).
iii) You should consider selling US holdings prior to establishing Canadian residency, in order to realize capital losses (since they won't be of much use after you leave the US).
iv) If you delay selling US funds to realize capital gains until you are a Canadian resident, you can avoid state tax.
v) Be very careful about what investments you purchase while residing in Canada (avoid anything that could be classified as PFIC - including Canadian mutual funds and ETFs. Stocks and bonds are safe, as are US domiciled ETFS).
vi) The day that you arrive in Canada your stocks, funds, will have their basis "stepped up" for Canadian tax purposes (only).

Cheers

FLBiker

  • Handlebar Stache
  • *****
  • Posts: 1537
  • Age: 45
  • Location: Canada
    • Chop Wood Carry FIRE
Re: Dual citizen, US resident - tax concerns in first year back...
« Reply #3 on: March 22, 2021, 06:47:31 AM »
Here are some other findings that may be useful to US persons returning to Canada with respect to non-retirement assets. Please let me know if there are errors or omissions:
i) You should close your US non-retirement accounts.
ii) You can move your US brokerage assets (stocks, bonds, ETFs) to Canada without selling them. This is important since selling them would be a taxable event. You cannot move all holdings (eg. US mutual funds).
iii) You should consider selling US holdings prior to establishing Canadian residency, in order to realize capital losses (since they won't be of much use after you leave the US).
iv) If you delay selling US funds to realize capital gains until you are a Canadian resident, you can avoid state tax.
v) Be very careful about what investments you purchase while residing in Canada (avoid anything that could be classified as PFIC - including Canadian mutual funds and ETFs. Stocks and bonds are safe, as are US domiciled ETFS).
vi) The day that you arrive in Canada your stocks, funds, will have their basis "stepped up" for Canadian tax purposes (only).

This jibes with my understanding.
i) I didn't do this, exactly, I just changed my mailing address (to a family member) and then I moved our taxable account once we moved.
ii) Yep, we did a transfer in kind.  Prior to moving, we changed our Vanguard mutual funds to Vanguard ETFs to facilitate this (which also wasn't a taxable event -- I forget what the exact term was).
iii) True, but we didn't have any losses.
iv) True, but we didn't have state tax.
v) True -- we're doing US Domiciled ETFs.  Basically, this just means we stay in US Dollars.
vi) True.