Importing Assets Into Domestic Taxing Jurisdiction: Learning from Canada

Countries have long expressed an interest in preventing the tax-free outflow of capital beyond their borders. Taxpayers with appreciated assets are of particular concern, especially when they shift their assets offshore in order to recognize gains outside their home country's jurisdictional reach. The United States, which views itself as a net exporter, is no exception. The United States has enacted several regimes to prevent these tax-free outflows, including a regime that taxes exiting assets at point of departure. In their zeal to prevent outflows, many countries like the United States have overlooked the taxation of assets entering (i.e. imported into) its taxing jurisdiction. The issue of entry, however, is no small matter. While the United States may view itself as a net exporter, the United States has consistently received substantial gross imports in terms of foreign trade and investment. Moreover, asset entry into the United States does not simply occur through traditional trade and investment but also through immigration when new arrivals become U.S. residents. Taxation of entering assets presents differing concerns that taxation of exiting assets. With respect to exiting assets, the country at issue is largely concerned about losing jurisdictional control once those assets move beyond the border. Asset entry instead raises the question of whether the country at issue is asserting too much jurisdictional authority. In other words, should the country at issue tax entering assets in full even if much of the gain previously accrued offshore? Similarly, should the country at issue fully account for pre-entry accrued loss? Countries are divided in this regard. The United States represents the majority view, treating the entry of assets as a nonevent when standing by itself. Assets entering countries with this view retain their historic basis to the extent the entering transaction would qualify as a nonevent if that transaction were to arise within a wholly domestic setting. This historic approach means that gain or loss of the post-entry sale of an asset is fully taken into account, regardless of whether that gain or loss economically accrued onshore or offshore. A small minority of countries, including Canada, take the opposite approach. This latter approach treats entry as a deemed sale/repurchase regardless of how the entering transaction would otherwise be characterized in a wholly domestic setting. This deemed sale/repurchase creates a fair market value basis upon entry, thereby limiting the new country's taxing jurisdiction to amounts that economically account solely after arrival. The purpose of this article is to discuss the shortcomings of the current U.S. entry system and to provide alternative suggestions for reform, focusing mainly on the fair market value construct provided by the Canadian tax system. Part I of this Article describes the three basic forms in which assets enter the United States and how each form creates potential tax consequences that deviate from the underlying economics. Part II of this Article describes how Canada addresses these same forms of entry and how their system eliminates this potential for deviation to the extent their system adheres to a fair market value construct. Part IV of this Article explores the historic justification of the current U.S. entry system. This examination reveals that the U.S. entry system may be legally defensible but that the system stems more from historical accident than from comprehensive forethought. This examination also reveals that the current U.S. entry system is administratively problematic, effectively favoring well-informed taxpayers at the expense of the U.S. fisc and the unwary. Part V of this Article then closes by describing possible solutions to the current U.S. entry system focusing primarily on a mark to market entry regime similar to that used by Canada.

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