Introduction
When U.S. citizens and green card holders move from the United States to Canada, they often encounter several complex tax issues. One of the most important—and frequently misunderstood—concepts is the cost basis step-up on immigration.
Under Canada’s tax system, the tax cost of many assets is generally reset when an individual becomes a Canadian tax resident. As a result, this deemed reset can significantly affect future capital gains taxation. Therefore, understanding how the step-up works, which assets qualify, and how the rules interact with ongoing U.S. tax obligations is essential for effective cross-border tax planning.
In this article, we explain how the cost basis step-up applies on immigration to Canada. In addition, we outline key statutory exceptions and highlight practical issues faced by U.S. persons who remain subject to U.S. worldwide taxation.
- Overview of the Canadian Cost Basis Step-Up on Immigration
Canada uses a deemed disposition regime to establish a clean tax starting point for new residents. The goal is straightforward: Canada taxes only the economic gains that arise after Canadian residency begins.
Under the Income Tax Act (ITA), most property owned at the time an individual becomes a Canadian tax resident receives a new Canadian tax cost equal to its fair market value (FMV) on the immigration date. This reset forms the foundation of the cost basis step-up.
- Deemed Disposition at Fair Market Value Before Residency Begins
Immediately before Canadian residency starts, the ITA treats the individual as if they sold most of their property at FMV.
Deemed Disposition – ITA Subsection 128.1(1)(b)
At the moment just before immigration:
- The individual is deemed to dispose of most property.
- The deemed proceeds equal the property’s FMV.
- No actual sale occurs; the transaction exists only for tax purposes.
As a result, this mechanism ensures that Canada does not tax gains that accrued while the individual lived outside Canada.
- Deemed Reacquisition and Adjusted Cost Base Reset
Immediately after Canadian residency begins, the tax system applies the second half of the mechanism.
Deemed Reacquisition – ITA Subsection 128.1(1)(c)
Upon becoming a Canadian resident:
- The individual is deemed to reacquire the same property.
- The reacquisition cost equals FMV on the immigration date.
- This FMV becomes the adjusted cost base (ACB) for Canadian tax purposes.
Consequently, Canada effectively steps up the cost basis of qualifying assets to their FMV on immigration.
- Property That Does Not Qualify for the Immigration Step-Up
However, not all assets benefit from the cost basis step-up. Several important exclusions apply, and these exclusions can materially affect future tax exposure.
Common Excluded Assets
- Taxable Canadian Property (TCP) – ITA s. 248(1)
This category includes Canadian real estate, certain Canadian business assets, and shares or interests that derive their value primarily from Canadian real property or resource property. TCP does not qualify for the deemed disposition and reacquisition on immigration. - Inventory of a Canadian Business
Inventory used in a business carried on in Canada does not receive a step-up. - Certain Intangible Business Assets (Class 14.1)
Specific intangible property used in a Canadian business remains excluded. - Excluded Rights and Interests – ITA s. 128.1(10)
Certain plans, arrangements, and defined rights—such as Canadian registered plans—fall outside the step-up regime.
Because these exclusions vary by asset type, a detailed asset-by-asset review before immigration is critical.
- Practical Tax Impact of the Canadian Cost Basis Step-Up
For most non-Canadian property, the Canadian tax cost resets to FMV on the immigration date. When the individual later sells the property as a Canadian resident:
- Canada taxes only the post-immigration appreciation.
- Canada does not tax pre-immigration gains, even if the sale occurs years later.
As a result, this framework forms a cornerstone of Canada’s immigration tax system and protects newcomers from taxation on historical gains.
- Special Issues for U.S. Citizens and Green Card Holders
For U.S. citizens and green card holders, the analysis does not end with Canadian tax rules.
The United States continues to tax U.S. persons on a worldwide basis, regardless of residency. Importantly:
- The U.S. does not provide a step-up in basis on immigration to Canada.
- For U.S. tax purposes, the cost basis generally remains the historic cost under IRC §1011, adjusted for depreciation, capital improvements, or other applicable items.
Dual Cost Basis Tracking
As a result, U.S. persons often must track two separate cost bases for the same asset:
- Canadian basis: FMV on the date Canadian residency begins
- U.S. basis: Original purchase price, adjusted over time using first in, first out (FIFO) by default
On a future sale:
- Canada taxes the gain from FMV at immigration to the sale price.
- Meanwhile, the U.S. taxes the gain from original cost to the sale price.
Although foreign tax credits may reduce double taxation, mismatched bases frequently create timing and calculation challenges. Therefore, careful planning remains essential.
- Key Takeaways and Why Cross-Border Planning Is Essential
Key Takeaways
- Canada generally provides a cost basis step-up to FMV on immigration for most non-Canadian property.
- Certain assets, including taxable Canadian property and specific excluded rights, do not qualify.
- The step-up ensures Canada taxes only post-immigration gains.
- U.S. citizens and green card holders do not receive a corresponding U.S. step-up, making dual basis tracking essential.
Why This Matters
The immigration cost basis step-up is one of the most powerful—and technical—features of Canada’s tax system. When structured correctly, it can significantly reduce future Canadian capital gains tax exposure. For U.S. persons, however, differences between Canadian and U.S. tax rules make advance planning, accurate valuations, and coordinated cross-border advice critical.
- Practical Example: Cost Basis Step-Up and Capital Gain Calculation After Immigration to Canada
Background Facts
Consider the case of John Doe, a U.S. citizen who previously worked at Microsoft USA and later returned to Canada after obtaining Canadian permanent resident status.
Born in England, John spent seven years working in the United States, first as a green card holder and later as a U.S. citizen. During his employment with Microsoft in the U.S., he was awarded 500 shares of Microsoft stock under an Employee Stock Ownership Plan (ESOP). Because John received these shares while he was a U.S. resident, Canada did not impose tax on the shares during that period.
Immigration to Canada and Cost Basis Reset
On May 15, 2024, John immigrated to Canada and began working for Microsoft Canada. As of that date, he became a Canadian tax resident. From a Canadian tax perspective, any future sale of the Microsoft shares would now be subject to Canadian capital gains tax.
Under Canada’s immigration tax rules, the date John became a Canadian tax resident is treated as the new acquisition date for the shares. This deemed reset of the tax cost is commonly referred to as the cost basis step-up.
Key Facts
- Original purchase price of Microsoft shares (ESOP):
$200 USD per share
Total original cost: $100,000 USD - Date of entry into Canada:
May 15, 2024 - Bank of Canada CAD/USD exchange rate (May 15, 2024):
1.3615 - Market value per share at end of day (May 15, 2024):
$416.56 USD
$567.14644 CAD - Stepped-up cost base for Canadian tax purposes:
$208,280 USD
$283,573.22 CAD
Subsequent Sale and Capital Gain
On August 15, 2025, John sold 50% of his Microsoft shares (250 shares) at a price of $520.17 USD per share. Using the Bank of Canada spot exchange rate of 1.3806, the selling price translated to $718.146702 CAD per share.
Because Canada applied the cost basis step-up on John’s immigration date, the bump-up adjusted cost base for Canadian tax purposes was $567.14644 CAD per share. As a result, John realized a Canadian capital gain of $37,750.07 CAD, calculated as follows:
This gain reflects only the post-immigration appreciation of the shares for Canadian tax purposes. Without the cost basis step-up, Canada would have calculated the gain using the original ESOP value, resulting in a significantly higher taxable capital gain.
Important Currency Consideration
The cost basis step-up applies only for Canadian tax purposes. The United States does not provide a corresponding step-up. As this example illustrates, exchange rate fluctuations can materially affect the amount of capital gain reported in Canadian dollars. In some cases, currency movements alone can increase or reduce a taxpayer’s Canadian capital gain, even if the share price movement appears modest in U.S. dollars.
If you are a U.S. citizen or green card holder planning to move to Canada—or if you have already immigrated—professional cross-border tax guidance can help ensure compliance, optimize outcomes, and avoid costly surprises.
Raj Pandher is a qualified CPA (cross border tax accountant), a Trust and Estate Practitioner (TEP) and a Certified Executor Advisor (CEA) who assists the U.S. citizens and green card holders immigrating from the U.S. to Canada with their U.S. Canada cross border income tax return(s) filing including foreign information return(s) reporting.
