The IRS issued guidance for individuals who emigrate from Canada and who wish to make an election under the U.S.-Canada income tax treaty regarding Canadian departure tax (Revenue Procedure 2010-19).
Under Article 13(7) of the U.S.-Canada treaty, if an individual is treated for purposes of taxation by one of the countries (the United States or Canada) as having disposed of property when the individual emigrates to the other country, and is taxed in that country, the individual may elect to be treated for the purposes of taxation in the other country, in the year that includes that time and all subsequent years, as if the individual had, immediately before that time, sold and repurchased the property for an amount equal to its fair market value at that time (a deemed disposition).
The election is available to anyone who emigrates from Canada to the United States, regardless of whether that person is a U.S. citizen or would otherwise have been subject to federal income tax on disposing of the property. Thus, any Canadian emigrant who is not subject to U.S. tax at the time of emigration will take an adjusted basis in the property equal to its fair market value and be taxed only on post-emigration gain when the property is ultimately disposed of. In the case of a Canadian resident who is a U.S. citizen or who would otherwise be subject to tax in the United States on property situated in the United States, the individual will be permitted to elect to accelerate the gain for U.S. tax purposes and to utilize foreign tax credits to eliminate double taxation.
Rev. Proc. 2010-19 sets out the procedures to be followed by individuals who wish to make an election. The procedures vary according to whether (1) the property in relation to which the election is being made would or would not be subject to U.S. tax if sold at the time of the individual’s emigration from Canada to the United States, and (2) the emigration occurs before March 29, 2010 (the effective date of Rev. Proc. 2010-19), or on or after that date.
Individuals who dispose of multiple properties immediately before ceasing to be a Canadian resident may not make the election under Article 13(7) unless the deemed disposition results in a net gain for Canadian tax purposes. If the deemed disposition results in a net loss, the individual may not make the election with respect to any of the properties.