I have helped hundreds of people successfully navigate from the US to Canada. If you're thinking of moving or retiring to Canada contact me today to chat about your plans.
I can be reached via email at email@example.com, by phone at 250-661-9417 or through my contact page here.
I look forward to speaking to you soon.
Phil Hogan, CPA, CA, CPA (CO)
Cross-Border Tax and Investment Specialist
How is it possible that someone would pay Canadian taxes on stock losses? Well, it absolutely is…
Under Canadian tax law, when individuals move to Canada (section 128.1(1)) their worldwide assets (excluding some specific type of Canadian assets) are “deemed to be disposed” and “reacquired” at the fair market value on the day they become a Canadian tax resident.
In simple terms all this means is that the cost basis of the individual’s investments is readjusted to fair market value on the day they move and therefore any accrued gain on these investments will not be taxed in Canada going forward.
Let’s use a simple example to illustrate this tax concept (we’ll ignore foreign exchange calculations for now):
Susan will be moving to Canada on June 30th…
Before the move, Susan owned shares of AAPL that she originally purchased for $50 (adjusted cost basis or ACB) and now are worth $100.
For US purposes she has an unrealized gain of $50 on those AAPL shares.
What happens if immediately after entering Canada and becoming a tax resident she sells those shares?
We know that for US purposes she will have a $50 capital gain on that transaction. Is the gain in Canada also $50?
The simple answer is no.
As we discussed above the cost basis of her investments are “adjusted” (also commonly referred to as “bumped”) to fair market value on the date of entry. So, using the figures above upon her entry to Canada the new cost in the shares of AAPL will be $100 (the fair market value at the time of entry). If she was to sell the shares immediately after entering Canada her Canadian gain would be $0.
Proceeds of $100 less new adjusted cost basis of $100 = $0 Canadian gain.
As mentioned briefly above this Canadian tax rule is in place to ensure new Canadian tax residents are not taxed on gains they have accrued or earned before they became a taxable resident of Canada. We won’t get into the details of the following, however please note that some assets such as Canadian real estate are exempt from these cost basis “bump” rules. The reason for this is that Canadian tax should always be levied on assets such as Canadian based real estate when eventually sold.
Ok, so now that we understand how the Canadian Income Tax section 128.1(1) works, let’s get to the actual topic of the article. How would one pay Canadian tax on stock sales that are losses?
Using the same example above let’s assume the following:
Susan originally purchased AAPL stock for $125 and it is worth $50 when she entered Canada
Now, based on these new sets of facts she has an unrealized loss of $75 on the AAPL shares.
When she moved to Canada the same “cost basis adjustment” is required and therefore her new Canadian ACB is now $50.
What happens if after she moves to Canada the AAPL shares increases in value back to $100 and she sells the shares?
For US purposes she would have a loss of $25 on the sale ($125 less $100).
However for Canadian purposes she would have a gain of $50 – proceeds of $100 less new adjusted ACB of $50.
Yes, in this case she will end up paying Canadian tax on a stock transaction that she actually lost money on overall.
This happens often and is very much a shock to those that have not properly planned. I’ve had many conversations will new clients that have a difficult time accepting this reality. That’s often because I might only get involved when the client contacts me for help in preparing their cross-border returns, well after they have arrived in Canada.
Hence why it’s terribly important to plan for your investments well before you move to Canada.
So, knowing what we know now about cost basis adjustments upon entering Canada what can we do?
First, well before the move make sure to reach out to a competent cross-border investment and tax specialist (I think I might know someone :))
Second, review your US portfolio for any positions that have accrued losses and consider selling these assets. You can also take advantage of this planning to offset some of the losses in the portfolio with any positions that have gains. It’s often not advisable to realize capital losses for US purposes before entering Canada as you may never be able to use those losses once you become a Canadian tax resident.
This planning can be quite important the value is very evident in years such as 2022 and 2023 when stocks have fallen significantly. Given how challenging the market has been in 2022 many clients moving to Canada in 2023 might get caught with Canadian tax on capital gains transactions if the market reverses suddenly after their entry.
Note however that the section 128.1(1) cost basis bump does not apply to registered US investment accounts such as IRA, ROTH IRA or 401k accounts. Other planning for these type of investments is highly advised however.
If you’re thinking of making the move to Canada and have assets in the US please reach out to me to discuss your plan. I look forward to chatting with you about your upcoming move to Canada.