Canadian Moving Back to Canada from USA - Cap Gains?

First I just want to say this has been one amazing forum, you guys have excellent information here!

I moved down to the USA because of my parents when I was 17.
Always wanted to move back to Canada permanently and now finally have the chance! I'm a dual-citizen and this looks to be a disadvantage rather than an advantage because of Capital Gain taxes.

I'm hoping that someone can confirm that what I've read on the CRA/IRS websites are in fact correct:

Scenario 1: I buy stocks in Canada through say CIBC. I then sell these stocks while permanantly residing in Canada, I would be taxed on 50% of my capital gains at my income tax bracket. But then I will also be taxed at 15% (long-term/1yr holding) by the USA - as capital gains does not qualify for the foreign tax credit. The only thing I can do is claim a deduction, but this would be even worse as I could not claim the tax credit to shield from double taxation of wages.

Scenario 2: Whiles living in the USA I have accumulated a stock portfolio through a US brokerage say Bank of America. I will move back to Canada in 2010. I'll sell these stocks whiles permanently residing in Canada through B of A. I owe the US 15% tax on cap gains. I then declare on my Canadian tax return these foreign capital gains. Essentially Canada wants to tax the full amount of capital gains at my income tax bracket (the 50% rule does not apply since these cap gains are foreign). So if my tax bracket is 25%, then I owe Canada an extra 8%.

Scenario 3: I buy a home in Canada after I move there as primary residence. I sell the home in the future, Canada does not call charge capital gains tax on this since it's primary residence. The USA however will consider it a long-term capital gain (held for 1yr+) and I'll pay 15% cap gains to the US.

Lastly, does anyone know of any reason to keep US citizenship after I move back to Canada? It seems it's best to turn it in...

US citizens living in canada, are indeed taxed by both CRA and IRS on their cap gains. However the IRS (by treaty) allows a special "re-sourcing", quite complicated; I;ve covered this on forums.serbinski.com, you shoould go there.

#1. Incorrect. Re-sourcing rules will result in no US tax owed.

#2. Incorrect. The Cdn tax you would owe would only be based on the growth after arrival in canada. When you move there, you are deemed to have sold and re-acquired all investments upon day of arrival. So, you would pay Cdn tax on post-arrival growth, US tax on entire growth, with some minor re-sourcing to balance things out, so that yoiu essentially pay only US tax on the US portion of the growth..

Tip: sell any losers before leaving US.

#3.Yes, but there are exemptions for the reasons you might move earlier than 3 years. So you are advised to keep your residence for 3 years if possible, but not the end of the world if you do not.

I urge you to visit forums.serbinki.com where I have covered these issues in more detail.

-- Sun Sep 13, 2009 1:51 pm --

As to citizenship, giving up US citizenship is a death-sentence to ever going back, so think on before doing it. You think the Berlin wall wa an inconvenience, think about the Us/Canada boder being a 20 feet high for you.

No US citizen in Canada pays more than pennies in US tax -- if at all -- so it woud not be a reason to give up citizenship. Most with families actually get free money ($1K/child) just for filing.

The only reason to give up citizenship is if you are hit hard by the foreign exclusion limit, which is $87,600, i.e. you earn over that much before you pay any US taxes. But with deductions, exemptions, credits and so on it works out higher than that before you pay any US taxes. You've got to be earning a pretty substantial amount before it starts to get painful.

Like agnelson says, the tax treaty makes the scenarios you outline not as onerous as you may think. If you have an IRA you may want to re-acquire everything in it to move the cost base up, as stuff in a tax shelter is not subject to the deemed disposition rule which applies in scenario 1 and 2 you mention.

And OMG, the IRS has finally updated publication 597: http://www.irs.gov/pub/irs-pdf/p597.pdf Although that's more about income.

You might find having a read through the instructions for Form 2555 helpful.

Us citizens living in canada are advised against using foreign exclusion (ie. Form 2555) for their CDn wages since, if they have kids, this prevents them from getting the child credit.

Since Cdn tax are higher, using 1116 for their wage in come more than covers their US tax. They use form 1116 for all other non-wahe income.

Even higher incomes still would have a lower tax rate in US.

There is no need to bump-up IRA basis, since Canada taxes 100% of IRA withdrawals, unlike IRS treatment of RRSPs. However, it is imperative that -- if you were considering moving IRAs to Roth's, that you do this BEFORE moving to canada (likley in 2010 when the income limits on rechaarcterizatons is abolished)

Othe rthan the re-sourcing rules (and when you retire, SS payments), the treaty doesn't rally apply to US citizens, so don't worry about reading 597 for anything useful.