THE PRICE IS RIGHT, THIS PRICE IS WRONG?! TRACKING COST BASES

Moving from the US to Canada brings a myriad of financial complexity with rules and decisions concerning wealth, retirement, investment and estate planning. Many of our cross-border clients maintain their US citizenship after moving to Canada. This results in the need for complex planning for tax obligations in both countries. The Steele Wealth Management team has the expertise and experience to manage these complexities. Our team is uniquely positioned because we can integrate Canadian and American wealth to form a coordinated strategy and we work closely with our clients to translate their personal needs into a plan specific to their unique situation. We are licensed and regulated in both Canada and the US, and therefore we can hold and manage investments for our clients in both countries simultaneously.

TAX REPORTING OBLIGATIONS

Our cross-border clients generally have tax reporting obligations in both Canada and the US. Under Canada’s tax system, income tax reporting obligations are based on residency status. Residency status is determined on a case-by-case basis. Generally, those with significant residential ties with Canada (such as employment, home, spouse or dependents in Canada) are considered Canadian residents for tax purposes. Canadian tax residents are taxable on their worldwide income from the date they become resident.

Those classified as Canadian tax residents may also be classified as “a US person” for US tax purposes.  A US person includes a US citizen, a US green card holder or a US resident. Individuals classified as a US person are subject to US income, estate and gift taxes. This means that a US person moving to Canada has reporting requirements in both countries.

Our team understands and integrates the complicated rules to keep our cross-border clients compliant with the regulations in both countries. One of the items that we manage for our clients is tracking the adjusted cost base of their investments and other assets.

TRACKING SEPARATE ADJUSTED COST BASES

For Canadian tax purposes, there are deemed acquisition rules that apply on the date that Canadian tax residency status is attained.  On that date, there is a deemed disposition for proceeds equal to the fair market value of the property and a deemed acquisition at the same amount. This fair market value becomes the adjusted cost base. The assets to which the deemed acquisition rules apply include foreign currency, securities and real estate located outside of Canada. The deeming rules do not apply to “taxable Canadian properties” (defined in the Income Tax Act) such as real estate located in Canada and certain shares of  private corporations resident in Canada where 50% of more the value is derived from Canadian real or immovable property, resource property, or timber property .

This bump-up (or bump-down) in the tax cost base is used to determine the capital gain or loss in the future when the asset is actually disposed of, upon settling a trust, or at death. These rules work so that any gains or losses accrued before Canadian residency are not included in determining a future Canadian tax liability.    

In contrast, for US tax purposes there is no adjustment and the assets retain their historical adjusted cost base. As a result, when an asset is sold, the gain or loss subject to US income tax is based on the original cost. Therefore, for our cross-border clients who migrate to Canada, it is imperative to track two adjusted cost base amounts for each asset.

REAL LIFE EXAMPLE

One of our cross-border clients had a US brokerage account, which is typical for our clients. Prior to moving, she contacted Steele Wealth Management. We analyzed her situation, collaborated with her tax professionals and prepared a comprehensive strategy for all her assets. We provided a consolidated wealth management solution to keep her on track to achieve her vision and financial goals. We now hold investments in both countries (including Roth IRA, RRSP and non-registered accounts) for this client and manage them simultaneously.

Detailed information about the securities held in her US brokerage account:

1. The securities were purchased for $500,000 USD. Therefore, this is the historical cost base of her shares for US tax purposes.
2. On the date that she moved to Ontario and became a resident for Canadian tax purposes, the securities were worth $800,000 USD and the exchange rate was 1.25. Therefore the cost base for her shares for Canadian tax purposes is $1,000,000 CAD
3. In her detailed plan, our team recorded both the US cost base and the Canadian cost base for future tax reporting, on a security-by-security basis.
4. In line with her plan, she sold the investments at the appropriate time and realized $1,200,000 USD. The exchange rate on the date of the sale was 1.3, therefore her proceeds were $1,560,000 CAD.

US tax reporting:

     The foreign tax credit from the Canadian taxes may reduce the US tax on the transaction.

Canadian tax reporting:

       The bump-up in cost base limits the amount of gain included for Canadian tax purposes to the appreciation        on the investments during her Canadian tax residency and the foreign currency fluctuation.

CONCLUSION

There are many complex issues to consider when planning a move to Canada. Even a relatively simple gain on the sale of a single investment is more complicated for cross-border clients. The example above highlights the importance of tracking two adjusted cost base amounts for each individual asset. In reality, this calculation is performed many times and incorporated into the greater wealth management plan of our clients. We recommend that clients contact Steele Wealth Management and start planning their move as early as possible to develop a thorough tax plan to minimize tax payable and maximize the funds available to achieve financial goals.