7 Things You Need To Know About Tax Relief for Canadians Living in U.S.

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It is important to understand US Taxes for Canadian Residents, especially if you have recently moved to the country. Permanently settling down in the US means that Canadians may end up paying double the taxes on the same income. Therefore, we present this guide with the necessary information from the Internal Revenue Service (IRS). Learn about tax issues for Canadians in the US. 

For an emigrating individual, it will all begin with Canada’s departure tax. Being an erstwhile resident of the country, they will have to pay a certain amount as if they have disposed of the capital property that they owned for fair market value.

Find out the inns and outs of the canadian departure tax. 

On arrival in the United States, they will have to pay a federal income tax based on the profit they earned as compared to the actual sales price. The IRS’s guide, Revenue Procedure or Rev. Proc. 2010-19 mentions that the United States-Canada Income Tax Treaty mentions tax relief in such situations. It would mean that emigrants from Canada can apply for relief from US federal income tax.

Here are other important details that Canadians moving to the US need to know about taxation:

Double Taxation on Emigrating from Canada

Do I have to File Canadian Taxes if I Live in the US? No, you don’t. In most cases, your departure from Canada means you relinquish Canadian tax residency. This happens after you pay the Departure Tax on sale of property you own. However, there exceptions, such as real and business property that is within Canada, pensions, and employee stock option plans.

On becoming a US resident, however, you owe US federal tax on the original basis and not how much you sell it for. Preventing double taxation is possible if the emigrating Canadian may elect being subject to US federal income tax just as if they disposed and reacquired the property immediately before the deemed (Canadian) disposition.

Understanding departure tax and residency determination.

According to the Rev. Proc. 2010-19, there are four categories of Canadians emigrating. Here’s how you can apply for tax relief based on the type you belong to:

Prospective Elections for Property Taxable

When attempting US Canada Tax Preparation in this category, you should either be a US citizen or someone who owns real estate or property within the country that constitutes part of U.S. permanent establishment.

Property taxable can be:

  1. US real property
  2. Personal property that is also the business property of a permanent establishment in the US
  3. Any property that may be taxable if a US citizen or resident sells it for a gain

Example

Ethan, who formerly was a Canadian resident and owned shared of stock, emigrates to the United States. When he sells (deemed sale) the stock, he has to pay the Departure Tax. But since he is a US citizen on emigration, IRS permits the US federal income tax may be offset by a foreign tax credit on the deemed sale since he paid the Departure Tax. For US federal income tax purposes, his tax basis will be the stock’s fair market value when he emigrates.

Prospective Elections for Property Not Taxable

Non-US citizens owning non-US property are part of this category. Formerly Canadian residents not subject to US tax when they emigrate are treated as if they sold and repurchased property immediately before coming to the United States. Therefore, the basis for US federal income tax purposes will be higher.

Example

Emma is a non-US citizen and owns Canadian property, which she sells. First, she pays the Departure Tax. Then she elects for relief from US federal income tax under Article XIII(7) of the Treaty. Emma will not be subject to US federal income tax, except afterward on the property appreciation after she emigrates. Her basis would be the fair market value when she leaves Canada.

Retroactive Elections for Property Taxable

Retroactive relief is available for Canadian residents who emigrated between September 17, 2000-March 29, 2010. If they had to sell property after emigrating but before they elected to apply for relief, they will file an amended US federal income tax return. The amendment has no statute of limitations and is only available for the year they moved to the US.

Example

Jacob, who owned shares of stock, paid the Departure Tax. Original purchase price is $10,000 and selling price $40,000. The stock price on the date of departure is $30,000. A year after his emigration, he reported a capital gain by reporting original purchase price of the stock for US tax purposes. Jacob may apply for retroactive relief, which means increasing the basis in his property from $10,000.00 to $30,000.00. He will report the gain in his 2008 US income tax return and offset the US tax with credit for the foreign one. Finally, Jacob can request a refund of US taxes paid in 2009.

Retroactive Elections for Property Not Taxable

Non-US citizens with non-US property who obtain US tax residency after September 17, 2000, are part of this category. A Canadian emigrant can elect to treat their property sale and reacquiring on the deemed disposition date. When they file US tax return after March 29, 2010, they may apply for retroactive election and receive amendments for the tax years during which they continued to file.  

Example

Tyson paid the Departure Tax on the shares he owned in a Canadian private company. He can now file the retroactive election when he files the 2010 US tax return. Tyson will be eligible for a stepped-up basis in the shares.

Owning Multiple Properties

For Canadian residents who own multiple properties when they emigrate can only elect in case of a net gain for Canadian tax purposes, and if it will be applied consistently to all properties.  

Example

Ava, a Canadian resident, owns real property in the US and stock in Canada. Assume that she experienced a net gain of $100,000.00 under the Departure Tax. If the deemed disposition is considered a net loss for Canadian tax purposes, no election to any of the properties will be available to Ava.

Making the Election

Moving From Canada to US Tax Implications can be tricky to understand. However, all Canadians who have recently emigrated to the US can follow these simple instructions:

  1. File your US federal income tax returns, reporting whether you experienced a gain or loss
  2. Attach IRS Form 8833 with election under Article XIII(7) of the Treaty to US federal income tax return
  3. Send along documentation that specifies the fair market value of the property for the Departure Tax
  4. Provide proof that you paid the Departure Tax

Finally, remember once you elect this, only the IRS can revoke it.

Did you know that you’ll need to determine your residency status with the Canadian government before wondering How to File a Canadian Tax Return from the US? Or that Dual Citizenship Taxes Canada USA means paying taxes to both governments? Find out more by contacting us before you miss the date for filing!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Akif CPA will not be held liable for any problems that arise from the usage of the information provided on this page.

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