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The Question

Hello Phil,

My financial advisor in the US mentioned something about a “cost basis reset” when you move to Canada but he couldn’t explain the details — he said it was “a Canadian thing” and I should find someone who knows that side of it. We found your name through the Americans in Canada Facebook group and watched a couple of your videos. Very helpful.

I’m 60, my wife Margaret is 58, and we’re moving from San Diego to White Rock, BC next March. Margaret is originally from Langley and has family all over the Lower Mainland, so we’ve been going back and forth for years. We finally decided it’s time — our youngest just graduated from college and there’s nothing keeping us in California anymore.

We have a taxable brokerage account at Fidelity with about $2M in it — mostly individual stocks, some blue chips we’ve held for 15+ years. Apple, Microsoft, Amazon — some of these positions have tripled or more. The original cost basis on the portfolio is probably around $700K total, so we’re sitting on roughly $1.3M in unrealized gains. We’ve been avoiding selling because we didn’t want to trigger the capital gains in California (state tax on top of federal).

We also have about $400K in a bond fund, $150K in cash, and our retirement accounts (two IRAs totaling about $900K and a Roth with $200K).

Margaret’s cousin told us that Canada “gives you a fresh start on the cost basis” and that the $1.3M in gains basically disappears for Canadian tax purposes. That seems too good to be true, and I’ve learned to be skeptical when something sounds that good. Can you explain how this actually works?

Thank you,
Patricia

Phil’s Answer

Hi Patricia,

It’s not too good to be true — it’s one of the genuine planning benefits of moving to Canada, and it’s actually really important to get right.

When you become a Canadian tax resident, Canada treats you as having acquired all of your property at fair market value on the date you arrive. This is called the “deemed acquisition” rule. So for Canadian tax purposes, your cost basis on that Fidelity account resets to whatever the stocks are worth on the day you become a Canadian resident.

Here’s why that matters: let’s say you bought Apple at $50 and it’s worth $200 on the day you arrive in Canada. For Canadian purposes, your cost is now $200. If you later sell it at $250, Canada only taxes the $50 gain that accrued while you were a Canadian resident — not the full $150 gain from your original purchase.

Now, the US side is different. The US uses your original cost basis ($50 in this example). So when you sell, the US sees a $200 gain. You’ll need to carefully coordinate the foreign tax credits between the two countries to avoid double taxation on the portion of gain that Canada doesn’t tax.

A few important things to note:

This step-up does NOT apply to certain property like Canadian real estate you might already own, and it does NOT apply to retirement accounts (IRAs, 401(k)s, Roths). Those are handled under their own treaty rules. So your $900K in IRAs and $200K Roth don’t get this benefit — but they don’t need it since they have their own treaty protections.

The bond fund and cash don’t benefit much from the step-up either (minimal unrealized gains), but they still need to be documented.

You absolutely need to document the fair market value of every position on your arrival date. Get account statements dated as close to your move date as possible. If you don’t have this documentation, reconstructing it later is a nightmare — I’ve seen people spend thousands in accounting fees trying to figure out what their cost basis should have been.

Also worth mentioning — if you have positions with large unrealized losses, you might want to consider selling those before you move, because once you get the Canadian step-up, those losses disappear for Canadian purposes.

Hope that helps, Patricia. Happy to walk through the specifics with you and Margaret.

Regards,
Phil Hogan, CPA, CA
phil@beaconhillwm.ca

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