RP 2010-19 - Deemed Disposition By Canadian Emigrants Basis Adjustment

Part III. Administrative, Procedural, and Miscellaneous
26 CFR 1.601.602: Tax forms and instructions.
(Also Part I, Section 894; Part II, United
States—Canada Income Tax Convention.)

Rev. Proc. 2010–19
SECTION 1. PURPOSE
This revenue procedure provides guidance for individuals who emigrate from
Canada and wish to make an election for
U.S. federal income tax purposes under
paragraph 7 of Article XIII (Gains) of
the Convention between the United States
of America and Canada with Respect to
Taxes on Income and on Capital, signed on
September 26, 1980, as amended by Protocols signed on June 14, 1983, March 28,
1984, March 17, 1995, July 29, 1997, and
September 21, 2007 (the “Treaty”) with
respect to property that is subject to Canadian departure tax under Canada’s deemed
alienation rules (the terms “alienation” and
“disposition” are used interchangeably
throughout this revenue procedure). This
guidance is limited to the circumstances
described in the revenue procedure and
therefore does not address other situations
in which the election under Article XIII(7)
may be available.
SECTION 2. BACKGROUND
Prior to amendment by the Protocol
signed on September 21, 2007 (the “2007
Protocol”), Article XIII(7) of the Treaty
provided that where, at any time, an individual was treated for purposes of taxation
by one Contracting State as having disposed of property and was taxed in that
State by reason thereof and the domestic law of the other Contracting State at
such time deferred (but did not forgive)
taxation, that individual could elect on
his annual return of income for the year
of such disposition to be liable to tax in
the other Contracting State in that year as
if he had, immediately before that time,
sold and repurchased such property for an
amount equal to its fair market value at
that time.
Instances of double taxation arose under the prior version of Article XIII(7).
Canadian residents who emigrated from
Canada to the United States and paid
Canadian departure tax on a deemed dis-

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position of their property could not elect
to be liable for U.S. federal income tax
on a deemed disposition of their property
if they were not U.S. citizens immediately before they ceased to be residents
of Canada and would not otherwise have
been subject to U.S. federal income tax on
a disposition of the property.
Article XIII(7) of the Treaty was
amended by the 2007 Protocol (“new Article XIII(7)”) to provide that where, at any
time, an individual is treated for purposes
of taxation by one Contracting State as
having disposed of a property and is taxed
in that State by reason thereof, the individual may elect to be treated for the purposes
of taxation in the other Contracting State,
in the year that includes that time and all
subsequent years, as if the individual had,
immediately before that time, sold and
repurchased the property for an amount
equal to its fair market value at that time.
Thus, under new Article XIII(7) the
election is now available to any individual
who emigrates from Canada to the United
States, without regard to whether the individual was a U.S. citizen immediately
before ceasing to be a resident of Canada
(or would otherwise have been subject to
U.S. federal income tax on a disposition of
property). If the individual is not subject
to U.S. federal income tax at the time of
emigration, the effect of the election will
be to give the individual an adjusted basis in the relevant property for U.S. federal income tax purposes equal to the fair
market value of the property as of the date
of the deemed disposition in Canada, with
the result that only post-emigration gain
will be subject to U.S. federal income tax
when there is a disposition of the property. As was the case prior to the changes
made by the 2007 Protocol, if the Canadian resident is also a U.S. citizen at the
time of his emigration from Canada or otherwise would be subject to taxation in the
United States on a disposition of the property (e.g., the property is real property situated in the United States (within the meaning of Article XIII(3)(a) of the Treaty)),
the individual may elect to be liable to tax
in the United States in that year as if he
had, immediately before the date of emigration, sold and repurchased such property for an amount equal to its fair market value (which means that the individ-

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ual may elect to accelerate the U.S. federal income tax on the deemed disposition). In that case, relief from double taxation would be governed by the rules of Article XXIV (Elimination of Double Taxation) of the Treaty.
The rule in new Article XIII(7) was
publicly announced in simultaneous press
releases issued on September 18, 2000,
by the Department of Finance Canada and
the U.S. Treasury Department. The press
releases stated that the new rule, if approved, would apply to changes in residence that took place on and after September 18, 2000. Consistent with the press releases, paragraph 3(e) of Article 27 of the
2007 Protocol provides that new Article
XIII(7) will have effect with respect to dispositions of property that occur (including,
for greater certainty, those that are deemed
under the law of a Contracting State to occur) after September 17, 2000.
SECTION 3. SCOPE
This revenue procedure provides guidance for taxpayers making an election
with respect to changes in residence for
taxpayers who emigrate from Canada
after September 17, 2000.
Sections
4.01 and 4.02 provide procedures for
taxpayers who emigrate from Canada
on or after March 29, 2010. Sections
4.03 and 4.04 provide procedures for
taxpayers who emigrated from Canada
after September 17, 2000, and before
March 29, 2010, and who are not
time barred from making the election.
Section 4.05 provides rules for deemed
dispositions of multiple properties.
SECTION 4. ELECTION
PROCEDURES AND EFFECT OF
ELECTION
.01 Election for property of an
individual emigrating from Canada on
or after March 29, 2010, with respect
to which a disposition of the property
would have been taxable by the United
States (“Prospective elections for
property taxable by United States”)
(1) Subject to section 4.05 of this revenue procedure (Deemed disposition of
multiple properties), the rules in this sec-

March 29, 2010

tion 4.01 apply, in the case of a change in
residence that occurs on or after March 29,
2010, to a Canadian emigrant’s property
that was subject to Canadian departure tax
under Canada’s deemed disposition rules
and with respect to which a disposition immediately before the individual’s change
of residence would have been subject to
tax by the United States in accordance
with the Treaty. Such property includes
(but is not limited to) the following:
(a) real property situated in the United
States (within the meaning of Article
XIII(3)(a) of the Treaty) with respect to
which gain from a disposition would be
taxable by the United States pursuant to
Article XIII(1) of the Treaty,
(b) personal property forming part of
the business property of a permanent establishment which a resident of Canada
has or had (within the twelve-month period
preceding the date of disposition) in the
United States, with respect to which gain
from a disposition would be taxable by the
United States pursuant to Article XIII(2) of
the Treaty, and
(c) property with respect to which gain
from a disposition would be taxable by
the United States pursuant to paragraph 2
of Article XXIX (Miscellaneous Rules) of
the Treaty (i.e., the saving clause).
(2) If an individual with property that
is subject to the rules of this section 4.01
makes an election pursuant to new Article
XIII(7) to be treated as having disposed of
and reacquired such property, the individual must recognize gain (and, if permitted
by section 4.05 of this revenue procedure,
loss) in the taxable year of the deemed disposition. If the individual is not a U.S.
citizen at the time of the deemed disposition (but is still a resident of Canada), alleviation of double taxation is governed by
paragraph 2 of Article XXIV (Elimination
of Double Taxation) of the Treaty. If the
individual is both a U.S. citizen and a resident of Canada at the time of the deemed
disposition, however, alleviation of double
taxation is governed by the rules of paragraph 4 of Article XXIV of the Treaty.
(3) The individual must make the election by reporting the deemed disposition
on the individual’s timely filed U.S. federal income tax return for the individual’s
first taxable year ending after the individual’s change of residence and attaching a
Form 8833, Treaty Based Return Position

March 29, 2010

Disclosure under section 6114 or 7701(b)
of the Internal Revenue Code, stating that
the individual is making an election to pay
U.S. federal income tax on a deemed disposition of property pursuant to new Article XIII(7). The individual must attach
documentation establishing the fair market value of the property, as determined
under Canada’s deemed disposition rules,
and confirming that gain (and, if permitted by section 4.05 of this revenue procedure, loss) was recognized and properly reported for Canadian tax purposes for the
taxable year of the deemed disposition.
The individual must retain copies of the
Form 8833 and accompanying documentation (including the information reported
to Canada) as required pursuant to section
6001 of the Code and the regulations promulgated thereunder.
.02 Election for property of an
individual emigrating from Canada on
or after March 29, 2010, with respect
to which a disposition of the property
would not have been taxable by the
United States (“Prospective elections
for property not taxable by United
States”)
(1) Subject to section 4.05 of this
revenue procedure (Deemed disposition
of multiple properties), in the case of a
change of residence that takes place on or
after March 29, 2010, the rules in this section 4.02 apply to a Canadian emigrant’s
property that was subject to Canadian
departure tax under Canada’s deemed disposition rules but with respect to which
a disposition immediately before the individual’s change of residence would not
have been subject to U.S. federal income
tax.
(2) If an individual with property that
is subject to the rules of this section 4.02
elects for U.S. federal income tax purposes
to be treated as having disposed of and
reacquired such property pursuant to new
Article XIII(7), the individual takes an adjusted basis in such property for U.S. federal income tax purposes equal to the fair
market value of the property as of the date
of the deemed disposition under Canada’s
deemed disposition rules if the individual
complies with the requirements of paragraph (3) of this section 4.02. An individual who makes this election will not be
subject to U.S. federal income tax, solely

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as a result of the election, with respect to
the deemed disposition of such property.
(3) The individual must make the election by reporting the deemed disposition
on the individual’s timely filed U.S. federal income tax return for the individual’s
first taxable year ending after the individual’s change of residence and by attaching
a Form 8833 to such return, indicating
on the form that for U.S. federal income
tax purposes the individual is electing
pursuant to new Article XIII(7) to take
an adjusted basis in the property equal
to its fair market value as of the date of
the deemed disposition under Canada’s
deemed disposition rules. The individual
must attach the documentation described
in section 4.01(3) of this revenue procedure and must retain copies of the Form
8833 and accompanying documentation
(including the information reported to
Canada) as required pursuant to section
6001 of the Code and the regulations promulgated thereunder.
.03 Election for property of an
individual emigrating from Canada
after September 17, 2000, and before
March 29, 2010, with respect to which
a disposition of the property would
have been taxable by the United States
(“Retroactive elections for property
taxable by United States”)
(1) Subject to section 4.05 of this
revenue procedure (Deemed disposition
of multiple properties), in the case of a
change of residence that took place after
September 17, 2000, and before March 29,
2010, the rules in this section 4.03 apply to
a Canadian emigrant’s property that was
subject to Canadian departure tax under
Canada’s deemed disposition rules and
with respect to which a disposition immediately before the individual’s change of
residence would have been subject to tax
by the United States in accordance with
the Treaty. See section 4.01(1) of this
revenue procedure for examples of such
property.
(2) If an individual with property that
is subject to the rules of this section 4.03
makes an election pursuant to new Article
XIII(7) to be treated as having disposed of
and reacquired such property immediately
prior to emigration, the individual must
recognize gain (and, if permitted by section 4.05 of this revenue procedure, loss)

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in the taxable year of the deemed disposition. If the individual was not a U.S.
citizen at the time of the deemed disposition (but was still a resident of Canada),
alleviation of double taxation is governed
by paragraph 2 of Article XXIV (Elimination of Double Taxation) of the Treaty.
If the individual was both a U.S. citizen
and a resident of Canada at the time of
the deemed disposition, however, alleviation of double taxation is governed by the
rules of paragraph 4 of Article XXIV of the
Treaty.
(3) The individual must make the election by reporting the deemed disposition
on an amended federal income tax return
for the open taxable year that includes the
date of emigration and attaching a Form
8833 stating that the individual is making
an election to pay U.S. tax on a deemed
disposition of property in the taxable year
that includes the date of emigration pursuant to new Article XIII(7). Thus, an individual may make an election with retroactive effect only if the statute of limitations under 6511 of the Internal Revenue
Code is open. Appropriate adjustments
must be made to avoid duplicate benefits
in years with respect to which the statute
of limitations on assessment and collection, as set out under section 6501 through
6504, is closed. If the statute of limitations is closed with respect to the year of
the deemed disposition, then the individual is time barred from making an election with respect to such property (however, the individual may still be able to
make the election with respect to property described in section 4.04 (Retroactive elections for property not taxable by
United States), subject to section 4.05(2)
of this revenue procedure (Deemed dispositions of multiple properties)). The individual must attach the documentation described in section 4.01(3) of this revenue
procedure and must retain copies of the
Form 8833 and accompanying documentation (including the information reported
to Canada) as required pursuant to section
6001 of the Code and the regulations promulgated thereunder.
(4) If, prior to March 29, 2010, an individual who had property the disposition
of which would have been subject to tax
by the United States at the time of emigration made an election with respect to such
property under Article XIII(7) by attaching a Form 8833 or similar statement to a

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timely filed federal income tax return for
the taxable year that included the date of
the deemed disposition, the IRS will not
challenge such election (and the individual
is not required to make a new election under this revenue procedure) provided that
the election is not inconsistent with the
principles set out in this revenue procedure
and that the individual has filed all U.S.
federal income tax returns and information
returns consistent with such election.
.04 Election for property of an
individual emigrating from Canada
after September 17, 2000, and before
March 29, 2010, with respect to which
a disposition of the property would not
have been taxable by the United States
(“Retroactive elections for property not
taxable by United States”)
(1) Subject to section 4.05 of this revenue procedure (Deemed dispositions
of multiple properties), in the case of
a change of residence that took place
after September 17, 2000, and before
March 29, 2010, the rules in this section
4.04 apply to a Canadian emigrant’s
property that was subject to Canadian
departure tax under Canada’s deemed
disposition rules but with respect to which
a disposition immediately before the
individual’s change of residence would
not have been taxable by the United States.
(2) If an individual with property that
is subject to the rules of this section 4.04
elects for U.S. federal income tax purposes to be treated as having disposed of
and reacquired such property pursuant to
new Article XIII(7), the individual takes
an adjusted basis in such property for
U.S. federal income tax purposes equal
to the fair market value of the property
as of the date of the deemed disposition
under Canada’s deemed disposition rules,
if he complies with the requirements of
paragraph (3) of this section 4.04. An individual who makes this election will not be
subject to U.S. federal income tax, solely
as a result of the election, with respect to
the deemed disposition of such property.
(3) If the individual had only property
described in section 4.04(1) of this revenue
procedure (and did not have property described in section 4.03(1) of this revenue
procedure (Retroactive elections for property taxable by United States)), the individual must make the election by attach-

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ing a Form 8833 to the individual’s first
timely filed U.S. federal income tax return filed after March 29, 2010, indicating
on the form that for U.S. federal income
tax purposes the individual is electing pursuant to new Article XIII(7) to take an adjusted basis in the property equal to the fair
market value of the property as of the date
of the deemed disposition under Canada’s
deemed disposition rules. The individual must attach documentation establishing the fair market value of the property, as
determined under Canada’s deemed disposition rules, and confirming that gain (and,
if permitted by section 4.05 of this revenue
procedure, loss) was recognized and properly reported for Canadian tax purposes for
the taxable year of the deemed disposition.
The individual must attach the documentation described in section 4.01(3) of this
revenue procedure and must retain copies
of the Form 8833 and accompanying documentation (including the information reported to Canada) as required pursuant to
section 6001 of the Internal Revenue Code
and the regulations promulgated thereunder. The individual must file amended
U.S. federal income tax returns for any
prior taxable years with respect to which
the statute of limitations on claiming a
credit or refund, as set out under section
6511 of the Internal Revenue Code, is open
and that are affected by the election (e.g.,
the year of disposition of property subject
to the rules of this section 4.04). Appropriate adjustments must be made to avoid
duplicate benefits in years with respect to
which the statute of limitations on assessment and collection, as set out under section 6501 through 6504, is closed.
(4) If, in addition to property described
in section 4.04(1) of this revenue procedure, the individual had property described
in section 4.03(1) of this revenue procedure (Retroactive elections for property
taxable by United States), the Form 8833
included with the election made in accordance with section 4.03(4) must include
the property described in section 4.04(1),
and no separate Form 8833 needs to be
filed under this section 4.04(4).
(5) If an individual with property that
is subject to the rules of this section 4.04
has disposed of any such property prior to
making the election provided in new Article XIII(7), that individual may make an
election with retroactive effect and file an
amended tax return to reflect the adjusted

March 29, 2010

basis of such property, provided the statute
of limitations under 6511 of the Internal
Revenue Code is open for the year of the
disposition. If the statute of limitations is
closed with respect to the year of the disposition of the property, then the individual is
time barred from making an election with
respect to such property (however, the individual can still make the election with respect to the remaining property, subject to
section 4.05(2) of this revenue procedure
(Deemed dispositions of multiple properties)). If the disposition of properties described in section 4.04(1) in a year with
respect to which the statute of limitations
has closed resulted in a net loss for U.S.
federal income tax purposes, the individual
may make an election with respect to the
individual’s remaining property or properties described in section 4.04 only if the individual makes appropriate adjustments to
the adjusted basis of the remaining property or properties to reflect the net loss
that was taken into account in the year for
which the statute of limitations is closed,
using any reasonable method to allocate
the adjustment. For example, the step up
in basis for the gain properties will be reduced by the amount of loss that was recognized with respect to the property that
was disposed of in the closed year.
(6) If, prior to March 29, 2010, an individual who had property the disposition
of which would not have been subject to
tax by the United States at the time of emigration made an election with respect to
such property under Article XIII(7) by attaching a Form 8833 or similar statement
to the first timely filed U.S. federal income tax return filed after the date of the
deemed disposition, the IRS will not challenge such election (and the individual is
not required to make a new election under
this revenue procedure) provided that the
election is not inconsistent with the principles set out in this revenue procedure and
that the individual has filed all U.S. federal
income tax returns and information returns
consistent with such election.

March 29, 2010

.05 Deemed disposition of multiple
properties
(1) If an individual is deemed under
Canadian law to have disposed of multiple properties immediately before ceasing
to be a resident of Canada with respect to
which gain or loss is recognized for Canadian tax purposes in the year of the deemed
disposition, the individual may not make
an election pursuant to new Article XIII(7)
unless the deemed disposition of all such
properties results in a net gain for Canadian tax purposes. If the deemed disposition of all such properties results in a net
loss for Canadian tax purposes, the individual may not make any election under
new Article XIII(7) with respect to any of
the properties. Such an individual may
neither claim an adjusted basis for U.S.
federal income tax purposes with respect
to any of the properties nor recognize gain
or loss for U.S. federal income tax purposes in the year of the deemed disposition
in Canada with respect to any of the properties.
(2) If an individual is deemed under
Canadian law to have disposed of multiple properties, any election under new Article XIII(7) must be made with respect to
all such properties. The individual must
prepare and file a Form 8833 listing each
such property. In the case of property subject to the rules of section 4.04 (Retroactive elections for property not taxable by
United States), if the individual has disposed of property with respect to which
that individual is time barred from making the election because the statute of limitations under section 6511 of the Internal
Revenue Code has closed, the individual
may still make an election with respect to
all of the individual’s remaining property
described in section 4.04, provided that appropriate adjustments are made to the adjusted basis of the remaining property as
set forth under section 4.04(5). If an individual is time-barred from making an election with respect to property subject to the

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rules of section 4.03 (Retroactive elections
for property taxable by the United States),
the disposition of which would have resulted in a net loss at the time of emigration, and makes an election with respect to
property subject to the rules of section 4.04
(Retroactive elections for property not taxable by the United States), the individual
must make appropriate adjustments to the
adjusted basis of the property that is subject to the rules of section 4.03.
.06 Irrevocability of election
An election made under this revenue
procedure cannot be revoked except with
the consent of the Commissioner.
SECTION 5. EFFECTIVE DATE
The effective date of this revenue procedure is March 29, 2010, the date of its
publication in the Internal Revenue Bulletin.
SECTION 6. PAPERWORK
REDUCTION ACT
The collection of information contained in this revenue procedure has been
reviewed and approved by the Office
of Management and Budget in accordance with the Paperwork Reduction Act
(44 U.S.C. 3507) and is reported on Form
8833 under control number 1545–1354.
SECTION 7. DRAFTING
INFORMATION
The principal authors of this revenue procedure are M. Grace Fleeman
and Lara A. Banjanin of the Office of
Associate Chief Counsel (International).
For further information regarding
this
revenue
procedure,
contact
Lara A. Banjanin at (202) 622–3880 (not
a toll-free call).

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