Protocol ratification. The US process to ratify the Canada-US treaty protocol finally commenced on March 13, 2008, when President George W. Bush sent it to the Senate for advice and consent to ratification. The Senate promptly referred the protocol to the Senate Foreign Relations Committee, where it will be fully considered and subject to a public hearing. During this stage, the Treasury generally presents a technical explanation and the Joint Committee on Taxation generally prepares an explanation--developments highly anticipated by practitioners on both sides of the border. These reports and the Senate Foreign Relations Committee report are often released shortly before the public hearing, following which the committee sends its report to the full Senate for advice and consent to ratification by a vote of two-thirds of the members present. If the Senate approves the protocol without a reservation or amendment that requires further negotiations with Canada, the instruments of ratification are prepared for the president's signature. Canada completed its ratification in December 2007, and the protocol is effective on the exchange of the instruments of ratification.

Basis bump for emigrating Canadians. Although the protocol provides for various effective dates depending on the particular provision, one change is effective immediately and retroactively to September 18, 2000: the election to step up the basis of property deemed disposed of by an individual ceasing to be a resident of one country and becoming a resident of the other country (protocol article 8(3)). The provision primarily benefits an individual who abandons Canadian residence in favour of US residence.

In 2000, both the United States and Canada agreed to provide double taxation relief to a Canadian resident (a non-US citizen, non-green-card holder) who abandons that residence and establishes US tax residence. Under Canadian tax law, a taxpayer who abandons Canadian residence is deemed to have disposed of certain property at its FMV; but for US tax purposes, the Canadian deemed disposition is not recognized and the property retains its historic tax basis. Assume that Mr. X--a Canadian resident, non-US citizen, and non-US resident--owns Canco shares with a cost basis of $100 and an FMV of $1,000 when he ceases to be a Canadian resident. Canada treats Mr. X as having sold the shares for $1,000, realizing a $900 gain. Mr. X then becomes a US tax resident and sells the shares two years later when they are worth $1,500. For US tax purposes, Mr. X's shares have a $100 tax basis and the $1,400 gain realized has a US source because he is a US resident and a non-Canadian resident at the time of the actual disposition; thus, the US tax cannot be offset by foreign tax credits for the Canadian tax paid. Mr. X is subject to tax in both countries on the same $900 gain, and without further planning he will likely incur double taxation.

The various strategies used over the years to trigger a pre-emigration taxable event for US tax purposes can be expensive and complicated, may not completely avoid double taxation, and can accelerate the individual's tax liability. The protocol remedies the double taxation and avoids complicated tax planning by allowing a taxpayer to simply elect to be treated for US tax purposes as having sold and reacquired the shares at their FMV when he changes residence. If Mr. X makes such an election, his shares' cost basis is $1,000 on the date his US residence begins, and on the actual disposition US tax is imposed only on any intervening appreciation. Although one must still consider whether an individual should make this election, the protocol's simplified coordination of the two tax regimes for Canadian tax emigrants to the United States is generally welcomed by both Canadian and US practitioners.