The IRS has issued guidance for individuals who emigrate from Canada and wish to make an election under the U.S.-Canada income tax treaty regarding Canadian departure tax (Revenue Procedure 2010-19).
Under Article XIII(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 a property 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 and be taxed only on post-emigration gain when the property is ultimately disposed of.
Article XIII(7) in its current form applies to changes in residence that take place on or after Sept. 18, 2000. The revenue procedure provides separate procedures for persons who emigrate after Sept. 17, 2000 and before March 29, 2010, and persons that emigrate on or after March 29, 2010.
The revenue procedure provides rules for recognizing gain and loss or for adjusting basis, as the case may be, after a deemed disposition. It also specifies how individuals affected by these rules report gain or loss.
Individuals who dispose of multiple properties immediately before ceasing to be a Canadian resident may not make the election under Article XIII(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.