Investors and Capital Gains2005-08-26
Investor applicants for permanent residence take note: section 128.1 of the Canada Income Tax Act can provide substantial tax relief but it can also cause tax headaches once you become resident in Canada.
Section 128.1 deems a new resident to have disposed of (and re-acquired) all capital assets at fair market value. The accountants among you will immediately recognize the benefit here. Any assets that had accumulated an unrealized capital gain now have a new cost base equal to the fair market value at time of residence. This is a significant benefit: unrealized gains do not have to be realized in Canada, as their cost base is “stepped up” to fair market value.
The downside of course is that loss properties will not necessarily generate capital losses (which can offset gains). A loss property (i.e., an asset that has decreased in value since purchase) will also be “stepped up” to fair market value. At the time of sale, no losses will be generated, and likely a gain will be realized and taxable.
Bottom line? Investors should have all assets properly valued just before establishing residency in Canada. In addition, investors should dispose of loss properties before establishing residency. This loss may be able to be carried forward in the investor’s home country to offset any future gains in that country for which the investor may be liable for tax.