Tracking Your Cost Base as an American or Dual-Citizen in Canada
Why Is Cost-Base Tracking Important for Americans and Dual-Citizens Living in Canada?
Written by Tiffany Woodfield, Associate Portfolio Manager, CRPC®, CIM®TEP®
Why Do Americans Living in Canada Have to Track the Cost Base of Investments?
Americans living in Canada permanently need to track the cost base of their investments to avoid double taxation and stay compliant with the CRA and IRS.
As a US person living in Canada, you have to report your worldwide income to the United States and Canada. If you held stocks in a taxable investment account in the US and kept them when you moved to Canada, you will have different costs for the same stock.
You will have one cost base from when you purchased the stock originally in the US and one from when you became a Canadian tax resident.
When you go to sell in the future (or receive any income from an investment), you will need to report it to both countries in the correct currency with the correct amount.
If this sounds complicated and like a headache, that’s because it is.
It’s important to work with a firm that will track the two different cost bases and produce a full set of tax receipts for the IRS and the CRA.
Cross-Border Blog
How SWAN Wealth Does Cost Base Tracking
Ideally, a client plans ahead and can start working with SWAN while they still live in the US.
This makes everything a lot simpler because we track their original cost base for the IRS and track the Canadian cost base when they become Canadian tax resident. We keep track of two sets of costs for each investment in the appropriate currency. This service also makes it easier if you plan on moving back to the US.
Of course, not everyone understands how this can save them time and money. Many people move to Canada with their investments still in the US.
We can help you uncover the cost of your investments when you officially became a Canadian tax resident. It just takes a few more steps.
Key Reasons for Tracking Cost Base When Moving to Canada from the US
Capital Gains Tax Calculation:
The cost base (or adjusted cost base, ACB) is essential for calculating capital gains or losses when an investment is sold. Both the US and Canada tax capital gains, but the methods and rates can differ. Knowing the cost base helps ensure accurate reporting and tax calculations in both countries.
Avoiding Double Taxation:
Proper tracking of the cost base can help minimize the risk of double taxation. By accurately documenting the original purchase price and any adjustments, investors can ensure they only pay taxes on the actual gain, not an inflated amount, due to exchange rate fluctuations or other factors.
Compliance with IRS and CRA Regulations:
Both the Internal Revenue Service (IRS) in the US and the Canada Revenue Agency (CRA) require detailed records of the cost base for investments. Accurate tracking helps ensure compliance with these regulations and avoids potential penalties for incorrect reporting.
Currency Conversion:
When living in Canada, investments might be made in Canadian dollars, while others might still be in US dollars. Tracking the cost base in both currencies helps manage the impact of exchange rate fluctuations on capital gains calculations.
Foreign Reporting Requirements:
Americans living in Canada must file the Foreign Bank Account Report (FBAR) and may need to report foreign investments on the IRS Form 8938 (Statement of Specified Foreign Financial Assets). Tracking the cost base is crucial for accurate reporting on these forms.
Tax Treaties and Credits:
The US-Canada tax treaty provides mechanisms to avoid double taxation, but these require detailed records of the cost base. Accurate tracking allows investors to claim foreign tax credits and benefits under the treaty, optimizing their tax situation.
Estate Planning and Inheritance:
Proper documentation of the cost base is vital for estate planning. It ensures that heirs receive accurate information for calculating their own cost base, which affects their future tax liabilities on inherited investments.
Strategic Tax Planning:
Knowing the cost base allows for strategic tax planning, such as tax-loss harvesting (selling investments at a loss to offset gains) or timing the sale of investments to take advantage of lower tax rates. It also keeps you in compliance with the IRS and CRA.
Practical Steps for Tracking Cost Base:
If you have substantial assets, we do not recommend tracking your cost base on your own.
It’s time-consuming, and mistakes can be costly. However, these are the steps that would be required to track your cost base.
1 - Maintain Detailed Records:
Keep records of all investment purchases, including dates, amounts, and any associated costs (commissions, fees, etc.).
2 - Adjust for Reinvestments and Dividends:
Adjust the cost base for any reinvested dividends or additional purchases to ensure it reflects the total invested amount accurately.
3 - Monitor Currency Exchange Rates:
Track the exchange rates at the time of purchase and sale to accurately convert the cost base and proceeds between US and Canadian dollars.
4 - Use Financial Software or Professional Help:
Use financial software to track investments and calculate the cost base. When you work with a cross-border advisor, they will track your cost base for you.
Tracking the cost base of your investments, ensures compliance with tax laws and allows you to optimize your tax liabilities. It ensures that you avoid potential complications from cross-border financial activities.
Next Steps
If you’re a Canadian resident or are planning on moving to Canada or the US and need assistance with moving and optimizing your investments, estate planning, wealth management and portfolio management, please get in touch. At SWAN Wealth, we specialize in Canadian financial planning, cross-border financial planning and cross-border wealth management.
Read More:
If you’re planning a cross-border move, these articles and guides will help you simplify your move and ensure you’ve covered everything.
About the Author
Tiffany Woodfield is a Portfolio Manager licensed in Canada and the USA, a Chartered Investment Manager (CIM), a Chartered Retirement Planning Counselor (CRPC), a Trust and Estate Practitioner (TEP) and the co-founder of SWAN Wealth Management, along with her husband, John Woodfield. Tiffany advises clients who live in Canada and the United States and want to simplify their cross-border financial plan, move their assets across the border, and optimize their investments to minimize their tax burden. Together, Tiffany and John Woodfield help their clients simplify their cross-border finances and create long-term revenue streams that will keep their assets safe whether they live in Canada or the U.S.