Canadian Departure Tax: Does the US Recognize What You Paid?

Not on its own. Your US cost basis stays at what you originally paid, so a later sale hands the US the full gain since purchase, including the part Canada already taxed. The fix is an election under Article XIII(7) of the Canada-US tax treaty, which resets your US basis to the value Canada used at departure, made on the US return for your first tax year ending after the move with Form 8833 attached.

Why doesn’t departure tax give me a US cost basis?

Because the US never saw a sale. When you cease Canadian residence, Canada deems you to have disposed of most property at fair market value under section 128.1(4)(b) of the Income Tax Act and taxes the accrued gain. Under IRC section 1012 your US basis is what the property cost you, and nothing in the US code moves it because another country ran a deemed disposition. You land in the US with the same shares at the same old cost, and a departure tax the IRS never sees.

What does the Article XIII(7) election actually do?

It makes the US treat the deemed sale as real. Under Article XIII(7) of the Canada-US tax treaty, a person taxed by one country on a deemed alienation can elect to be treated in the other country as if they had sold the property at fair market value and bought it straight back. So for US purposes you sold and rebought everything at the departure-date value. It doesn’t happen by default. Miss the Form 8833 on your first-year US return and there’s no election (Rev. Proc. 2010-19, ss. 4.01(3) and 4.02(3)).

Point of comparison	Without the election	With a timely election
US basis after the move	Original cost (IRC 1012)	FMV at the Canadian deemed disposition, for property a US sale wouldn’t have taxed (Rev. Proc. 2010-19, s. 4.02(2)); property the US could have taxed runs through s. 4.01 instead
US gain when you later sell	Everything since you bought, including the gain Canada taxed	Growth since the move, and on s. 4.01 property only after you’ve paid US tax on the earlier gain
Paperwork	None	Form 8833 plus FMV and Canadian-reporting documentation
Deadline	None	Timely filed US return for your first tax year ending after the residence change (s. 4.02(3), and s. 4.01(3) for s. 4.01 property)
Can you undo it?	Nothing to undo	Only with IRS consent (s. 4.06)

The IRS wrote Rev. Proc. 2010-19 to administer this election for Canadian emigrants, and Section 4.02(2) is scoped property by property. For property the US couldn’t have taxed on a sale the moment before you left, which covers most of what an ordinary emigrant holds and nothing a US citizen holds, your US basis becomes the fair market value Canada used and the election itself triggers no US tax.

What if I’m a US citizen, or I own US property?

A US citizen has no Section 4.02 property. The treaty’s saving clause keeps US tax alive on everything you own, so the whole deemed disposition sits in Section 4.01 of Rev. Proc. 2010-19. If you’re not a citizen, only your US property lands there. Section 4.01 covers property a sale immediately before your move “would have been subject to tax by the United States in accordance with the Treaty”. Elect and Section 4.01(2) makes you recognize the gain in the year of the deemed disposition, pulling a US tax bill forward. Loss is named in that same sentence, conditioned on Section 4.05.

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.” Rev. Proc. 2010-19, s. 4.01(2)

So the sentence names a loss as well as a gain, which matters if the US property you’re carrying is worth less than you paid. Read Section 4.05 before assuming that helps you, because it only restricts. Its rules run to a multiple-property emigrant, in the all-or-nothing section below, and there a net loss removes the election across the whole portfolio rather than opening anything. It grants nothing on the loss side, so whether a single-property emigrant sitting on a loss can elect at all is a question to put to a preparer rather than one this page settles.

Section 4.01 reaches US real property under Article XIII(1), business property of a US permanent establishment, and, through the saving clause at Article XXIX(2), everything a US citizen owns. Relief from the doubling comes through Article XXIV of the treaty, and the step-up isn’t the route. Section 4.01(2) sends a non-citizen who was still a Canadian resident at the deemed disposition to Article XXIV(2), where Canada deducts the US tax from Canadian tax, and it sends a US citizen resident in Canada to Article XXIV(4), where Canada deducts first and the US then credits the Canadian tax left after that deduction.

You can’t carve it out. The election covers every property Canada deemed disposed, so one US rental inside a non-citizen’s ordinary portfolio gets recognized under 4.01 while everything else steps up under 4.02. If you’re a US citizen, a green card holder, or you own anything American, put the full property list in front of a cross-border CPA.

How and when do I make the Article XIII(7) election?

On one specific return, and the date is the same under either section. Sections 4.02(3) and 4.01(3) of Rev. Proc. 2010-19 both require you to report the deemed disposition on your timely filed US return for the first taxable year ending after your change of residence, and to attach Form 8833, the treaty-position disclosure under IRC 6114. The US date is April 15 (IRC 6072(a)), before the April 30 CRA balance-due day, or June 15 if you file as a nonresident alien with no wages subject to US withholding (IRC 6072(c)). Section 4.02(3) is the step-up case; a US citizen elects under 4.01(3).

What goes with the first-year return	Where the rule sits
Report the deemed disposition on the return itself	Rev. Proc. 2010-19, s. 4.02(3), and s. 4.01(3) for s. 4.01 property
Attach Form 8833 citing Article XIII(7), listing every deemed-disposed property	s. 4.02(3) or s. 4.01(3), plus s. 4.05(2)
Attach documentation of each property’s fair market value under Canada’s rules	s. 4.01(3), pulled into s. 4.02(3)
Attach proof the gain was recognized and properly reported for Canadian tax	s. 4.01(3), pulled into s. 4.02(3)

“First taxable year ending after your change of residence” usually means the calendar year you moved, so a June mover files that return the following April. Move in November or December and the same rule still points at the move year, even though you were a US nonresident for almost all of it and might not otherwise file. A mover who files that year as a nonresident alien, with no wages subject to US withholding, has until June 15 rather than April 15 (IRC section 6072(c)). Unless that’s you, I’d calendar it the day you start the Canadian departure return rather than the day you file it, because the US date lands first. It’s easy to lose track of, and it’s on the full leaving-Canada checklist.

Is the treaty election all-or-nothing?

No picking. Section 4.05(2) of Rev. Proc. 2010-19 makes it all-or-nothing: if Canada deemed you to dispose of multiple properties, the election must cover all of them, and the Form 8833 has to list each one. In that same multiple-property case, Section 4.05(1) also blocks the election unless those deemed dispositions produce a net gain for Canadian tax purposes. And once made, it sticks.

An election made under this revenue procedure “cannot be revoked except with the consent of the Commissioner.” Rev. Proc. 2010-19, s. 4.06

Run the numbers before you file.

Can’t I just claim a US FTC instead?

Rarely. The reason is timing. Canada taxed a gain the US doesn’t tax in the move year unless you elect, so there’s no US tax for a credit to offset, and the US gain arrives years later with no Canadian tax that year to credit. IRC 904(a) also caps the credit by income from sources outside the US, while a US resident’s stock sale is US-source under IRC 865(a). Article XXIV carries the Section 4.01 relief: 4.01(2) sends a non-citizen to XXIV(2), where Canada deducts the US tax, and a US citizen to XXIV(4), where the US credits the Canadian tax left after Canada’s own deduction.

What if I filed without the election?

Get advice before you sell. The revenue procedure’s four corners don’t hand current movers a clean fix. Its stated window is the timely filed first-year return, and its retroactive-election sections (Rev. Proc. 2010-19, Sections 4.03 and 4.04) were written for people who emigrated after September 17, 2000 and before March 29, 2010. Someone who moved recently and missed the attachment isn’t in either. Outside the procedure, general relief routes get raised, none of them automatic.

• a corrected return filed before the due date passes
• an amended return
• a late-election relief request under the section 301.9100 regulations

An election whose due date comes from a revenue procedure is the kind those rules were written around, but none of it is a promise. Which route is open turns on your facts and how that return was filed, so it’s a call for a cross-border CPA.

What does the double-tax math look like?

Same portfolio as our departure-tax guide, on a 1:1 illustration: the Canadian figures are Canadian dollars, and every US determination gets made in US dollars (IRC section 985). Without the election your US basis stays at the $120,000 cost, so a $230,000 sale is a $110,000 US gain, $80,000 of it already taxed by Canada. Elect in time and the basis resets to $200,000, so the US gain is $30,000. That’s the Section 4.02 case. A US citizen has no Section 4.02 property, so electing taxes the $80,000 in the move year and leaves the $30,000 for the sale year.

The election is a federal treaty position, and states write their own rules. Ask your preparer whether yours recognises a treaty basis adjustment, and settle it before the sale.

For the related mismatch that shows up at death rather than departure, deemed disposition on death vs US stepped-up basis covers how Canada taxes unrealized gains at death while the US gives heirs a free basis reset.

If you haven’t left yet, estimate the Canadian side first to size the gain the election would protect. Coming the other direction? Moving back to Canada from the US covers the inbound deemed acquisition under 128.1(1)(b) and (c), which resets your Canadian cost base at fair market value on the day you re-establish ties.

If the property drops after you leave and you sell at less than the departure FMV, the treaty election means the US recognizes the loss. On the Canadian side, 128.1(8) can reduce the departure gain directly, but only where the property was still taxable Canadian property at the time of sale. The two elections operate independently.

Is Canada’s departure tax the same thing as an exit tax?

Yes, same machinery, two names. What people call Canada’s exit tax or departure tax is the deemed disposition in section 128.1(4)(b): the day you cease Canadian residence, most of your property is treated as sold at fair market value and the accrued gain is taxed on your final resident return. It isn’t a separate levy with its own rate, it’s ordinary capital gains tax triggered by the move instead of a sale. The US has its own, unrelated exit tax for citizens and long-term green-card holders who expatriate, so “exit tax” in a cross-border conversation always needs a country attached.

How much is Canadian departure tax?

There’s no flat rate; it’s your regular tax on whatever gains the deemed disposition crystallizes: roughly half the gain goes into income, taxed at your marginal rate for the departure year. A portfolio with no accrued gain owes nothing; a large low-basis position can owe plenty, and some property (Canadian real estate, RRSPs) is carved out of the deemed disposition entirely. The mechanics, the exemption list, and the T1161/T1243 forms live in the departure tax guide, and you can estimate your own number before deciding whether the election on this page matters to you.

What should I do next?

If you’re moving this year, save your departure-date market values and the Canadian filings showing the deemed gain, then calendar the election for the US return covering the year you moved. Already moved? Pull that return and check for a Form 8833. If the departure date itself is disputed, the order the residency tests run in is where that question starts, because the election’s deadline keys to the year you changed residence.

• If you are weighing whether a full cross-border review is worth the fee, the assessment guide breaks down what it covers and when it pays for itself.
• If you end up moving back to Canada later, unwinding the deemed disposition covers what happens to this same treaty election in reverse.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.