Why your capital gain differs on US and Canadian returns

Why is my gain different on my US and Canadian returns?

The same stock sale can show a different gain in each country because five rules differ: starting cost, currency, cost per share, loss restrictions and the share of the gain taxed. Each country calculates its own gain from its own cost, currency and loss rules, so converting the final gain from one return into the other currency generally does not reproduce the other return's number.

The arrival-date row applies only to investments you already owned when you became a Canadian resident. If you bought after becoming a resident, or were a Canadian resident from birth, Canada's starting cost is the purchase price converted at the purchase-date rate; the other rows still apply.

These rules assume each sale is a capital transaction. If trading amounts to a business, Canada can treat the profit as business income instead; the CRA says to decide whether each sale is a capital or an income transaction (Guide T4037). For Canadian shares, an election under subsection 39(4) on Form T123, filed with the return for a year in which you sold one, treats all your Canadian securities as capital property from then on; it does not cover US shares, and traders and dealers cannot use it (section 39).

Why does Canada use my value on the day I moved while the IRS uses what I paid?

Canada generally does not tax growth that happened before you became a Canadian resident, because the Canadian cost of most investments you brought with you resets to market value on that day. The US keeps your original purchase cost, so the same growth still counts in your US gain (CRA newcomer rules; Publication 551; IRS rules for citizens abroad).

The reset works in both directions. If the shares were worth less than you paid, Canada starts from the lower value, so a drop before you arrived does not count as a Canadian loss, though it can still count as a US loss (Income Tax Act, section 128.1).

The Canadian date is when tax residency begins. A former Canadian resident who returns can elect in writing, by the filing due date for the year of return, to adjust the arrival cost of property owned throughout the absence (subsection 128.1(6)). For that election, other exceptions and move-year filings, see moving from the US to Canada.

Which exchange rate do I use on each return, and can currency alone create a gain?

Yes. Canada measures every sale in Canadian dollars, so an exchange-rate change between purchase and sale can create a Canadian gain or loss even when the US-dollar share price did not move. For shares priced in US dollars, the US return stays in US dollars and shows none of that effect.

For Canada, convert proceeds at the sale-date rate, cost at the acquisition-date rate, and selling expenses at the rates when incurred (CRA conversion rules). For transactions at various times in a year, the CRA also accepts the Bank of Canada's annual average rate; to choose a rate, see foreign income on a Canadian return. An individual cannot elect to report in US dollars: the functional-currency election is open only to certain corporations resident in Canada (section 261).

For investments with an arrival-date cost reset, establish that starting value in Canadian dollars at the residency date. For later purchases, convert each purchase separately before updating the Canadian average cost.

For the US, a purchase and sale both priced in US dollars need no Canadian-dollar conversion. For transactions in another currency, translate cost, proceeds and expenses into US dollars at the applicable transaction rates (IRS currency rules).

Keeping the proceeds in USD does not postpone reporting the stock sale. The US dollars themselves are a separate matter: converting or spending them later can create another Canadian gain or loss from currency movement, and an individual's net foreign-currency gain or loss for the year counts only to the extent it exceeds C$200 (Income Tax Act, subsection 39(1.1)).

Why do the countries count my cost per share differently?

Canada generally averages the cost of identical shares. The US generally uses the cost of the specific shares sold if properly identified; otherwise it uses first-in, first-out, meaning the oldest shares first (section 47; Publication 550).

For Canada, combine the Canadian-dollar costs of identical shares you own across taxable accounts into one pool: your running total cost and share count for that stock. Divide the pool's total adjusted cost base (ACB: your cost, adjusted for splits, returns of capital and similar events) by the number of shares. Each purchase changes the average; a sale removes the average cost of the shares sold and leaves the average per remaining share unchanged. A broker's account-specific average may therefore be incomplete.

For US stock held by a broker, Publication 550 treats shares as identified when you tell the broker which shares to sell at the time of sale and receive written confirmation within a reasonable time (Publication 550, identifying stock sold). It does not describe choosing a lot later on a worksheet.

Mutual fund shares, and shares held through a dividend reinvestment plan in a custodial account, can use a US average-basis method (Publication 550, average basis). Those exceptions do not make Canadian averaging the default US method for ordinary shares.

Why was my loss allowed on one return and denied on the other?

A loss can differ because the countries calculate different costs, because the arrival-date reset removed a drop in value from before you arrived, or because only one country's replacement-purchase rule applies. Check the calculated loss on each return before testing the rules below.

Affiliated persons include your spouse or common-law partner, a corporation controlled by you or your spouse or common-law partner, a partnership in which you are a majority-interest partner, and a trust in which you are the majority-interest beneficiary (CRA: capital losses; section 251.1). The CRA's examples do not mention a replacement bought inside an RRSP or TFSA, so check that case before relying on a Canadian loss. The add-back to cost applies to the property of the person who acquires the replacement (section 53), so if an affiliated person buys it, the denied loss is not added to your own cost.

Because the US test has no holding requirement, a loss can be denied in the US and allowed in Canada: if you buy the replacement and sell it again before the 30 days after your sale end, and no affiliated person still owns it, Canada's end-of-period test is not met. Check all relevant accounts, automatic reinvestments and purchases by a spouse or controlled corporation; a broker's loss figure alone does not resolve both countries' rules.

An allowed loss is also used differently. In Canada, an allowable capital loss offsets taxable capital gains, and a net capital loss can be applied to the three preceding tax years (request it on Form T1A) or to any future year (CRA: capital losses). On the US return, a net capital loss offsets other income only up to US$3,000 a year, and the rest carries forward (IRS Topic 409).

Why does Canada tax only part of the gain while the US shows all of it?

Canada generally includes 50% of a capital gain in income. The US reports the full realized gain before applying loss offsets and any applicable exclusions; it can apply different rates according to the holding period (section 38; IRS Topic 409).

Canada's inclusion rate is the share of the gain included in income, not the tax rate charged on that income. On the US return, ordinary investment shares held more than one year generally produce long-term gains; shares held for no longer than that generally produce short-term gains.

Compare full gains first, then taxable amounts; comparing Canada's taxable portion with the US full gain mixes two stages.

Where does each sale go, and how do I reconcile the returns?

Canada reports capital investment sales on Schedule 3. The US generally reports sales on Form 8949 and summarizes the results on Schedule D; certain qualifying transactions can go directly on Schedule D (CRA T5008 instructions; Form 8949 instructions).

Quebec residents also report capital gains and losses on Schedule G of the Québec return (Revenu Québec).

Reconcile each sale in this order:

1. Match the security, owner, quantity and sale to the broker records.
2. Establish the separate Canadian and US starting costs.
3. Apply each country's currency and share-cost rules.
4. Include fees and each country's denied-loss adjustments.
5. Compare full gains, then carry each country's result to its return.

Reconciling gains does not resolve double-tax relief; see why US tax can remain after paying Canadian tax.

My T5008 is in US dollars and the cost looks wrong: which gain do I use?

Each return takes its own gain: Schedule 3 uses the Canadian-dollar calculation and Form 8949 the US-dollar one. T5008 box 20 may not equal your adjusted cost base, and the CRA requires adjustments when needed; the slip's book value is a record to start from, not a substitute for a documented Canadian cost calculation (CRA box 20 warning).

Check T5008 box 13: a USD slip still needs a Canadian-dollar calculation, and a blank box generally indicates Canadian dollars under the T5008 guide.

If you received no Form 1099-B, Form 8949 still lists the sale, using box C (short-term) or box F (long-term). For an incorrect US basis reported on a Form 1099-B, use the correction procedure in the Form 8949 instructions.

Dates can differ too. For US exchange-traded stock, the holding period ends on the trade date and the sale generally belongs to the year of the trade (Publication 550); the T5008 shows the settlement date (T5008 guide). For a sale near year end, confirm which date each return follows before matching the slips.

Do these rules cover sales inside an RRSP or TFSA, or of Canadian mutual funds and ETFs?

Not fully. RRSPs, TFSAs and Canadian funds follow different rules, so check the account or investment type before using ordinary taxable-account calculations.

• For sales inside an RRSP or TFSA, see Canadian registered accounts on a US return.
• For Canadian mutual funds and ETFs, check the passive foreign investment company rules and potential Form 8621 reporting (IRS Form 8621 instructions); see funds bought outside the US.

What records do I need from my move and each purchase?

Keep evidence for both starting costs and every later adjustment. The CRA specifically asks newcomers to retain arrival-date market values, while the IRS requires records supporting the basis of shares sold (CRA newcomer rules; Publication 551).

• At the move: tax-residency date, holdings and quantities, market-value evidence, original purchase confirmations and the arrival-date exchange rate.
• For each purchase and sale: trade confirmations, trade and settlement dates, quantity, currency, commissions, exchange rates and the source of those rates.
• For cost adjustments: stock splits, reinvestments, returns of capital, prior denied losses and transfers between accounts.
• For US lots: instructions identifying shares sold and the broker's written confirmation.
• For loss sales: relevant replacement purchases and ownership records covering the period before and after the sale, including affiliated-person or spouse transactions.

Example

An illustrative sale shows why arrival-date cost and currency can pull the two gains apart. All amounts below are labelled US dollars (US$) or Canadian dollars (C$); the exchange rates are assumptions, not historical rates.

Assume a US citizen bought US shares held in a taxable account for US$10,000 before moving. The shares were worth US$20,000 when Canadian tax residency began and sold later for US$20,000. There were no fees, other purchases, cost adjustments or loss offsets.

The shares did not rise in US-dollar value after the move. Canada's C$4,000 gain comes from the exchange-rate change during Canadian ownership. The US gain includes growth before the move. The Canadian taxable amount is not the Canadian tax bill, and the table does not calculate either country's tax or foreign tax credits.

Different for you?

The following situations need additional rules before the two returns can be reconciled.

• Your residency date or arrival-date cost is uncertain: see moving from the US to Canada.
• You are leaving Canada: Canada treats most investments as sold at market value on departure, and a US citizen can elect under treaty Article XIII(7) to have the US treat them as sold then too, which brings US gain or loss forward with foreign tax credits (Treasury explanation); see moving from Canada to the US and leaving Canada.
• The shares came from employment: see stock awards and pay after a move.
• The investment is a Canadian mutual fund or ETF: see funds bought outside the US.
• The sale occurred inside an RRSP or TFSA: see Canadian registered accounts on a US return.
• You need a Canadian credit for foreign tax: see foreign income on a Canadian return.
• US tax remains after Canadian tax: see why you still owe the IRS after paying Canadian tax.
• Costs are missing, replacement purchases involve several accounts, or the countries disagree on a loss: use cross-border tax and bring purchase records, arrival values, transaction slips and both cost schedules.