What happens if the deemed acquisition price is lower than the actual acquisition price when establishing Canadian residency?

Question

According to the Canadian Revenue Agency:

Deemed Acquisition on Becoming Resident:
A taxpayer who becomes a resident of Canada at any particular time in a taxation year is deemed under subsection 48(3) to have acquired at that time each property owned at a cost equal to fair market value at that time. Property that is "taxable Canadian property" as described in paragraph 115(1)(b), or deemed to be taxable Canadian property because of an election under paragraph 48(1)(c), is excepted from subsection 48(3).

As a U.S. tax resident moving to Canada this year, what happens if the deemed acquisition cost is lower than the actual price of acquisition? Will I have randomly lost money? For instance:

• Jan 1st (USA tax resident) living in the USA: Buys $500,000 USD worth of stock.
• Aug 1st (USA/CDN tax resident) departure & arrival: The stock purchased for $500,000 USD is now worth only $300,000 USD.
• Dec 1st (CDN tax resident) living in Canada: Sells all stock for $1,000,000 USD.

Because of this deemed acquisition rule, will I have to pay capital gains on ($1,000,000 - $300,000) and incur a loss of $200,000 into thin air? Alternatively, is there a way for me to elect a higher "actual" cost basis? Can I claim the deemed acquisition as a loss with the IRS to recoup this amount?

Answer 1

Yes, the $200,000 loss would be incurred into thin air. When you are entering Canada, you are essentially starting a new "year" with them at that point. So it's like having it cost $500K one year, $300K the next, and $1M the following.

This rule is quite straigtforward. If you are concerned that this will cause you to lose money, then you really should wait a bit before entering Canada, so that you don't quite lose so much.

On the flip side, it does benefit the people the majority of the time. And allowing exceptions would open the door for money laundering (e.g. selling it to yourself for a higher price before moving to Canada, and claiming a loss on your income tax statement).