REFERENCE GUIDE U.S. ESTATE TAX

REFERENCE GUIDE U.S. ESTATE TAX

Can The U.S. tax Implications Affect Me?

Canadians who die owning “US situs property” – property that is considered to be situated in the US under US rules – may be subject to US estate tax on death. This can affect a vacation property.

This reference guide outlines what constitutes US situs property and highlights how and when US federal estate tax may apply, as well as some possible strategies that may be available to minimize US estate tax. 

Please note: 

• This reference guide is intended for individuals and couples who are Canadian residents, not US citizens or Green Card holders and who have not been US citizens at any time in the preceding 10 years. US citizens, Green Card holders and individuals who were citizens of the US within the past 10 years are subject to different rules and should consult with qualified cross-border legal and accounting advisors regarding their situation. 
• This reference guide deals only with applicable US federal estate tax laws in a general manner. It does not deal with state estate taxes which may also be applicable in certain circumstances. 
• For more specific advice relating to your situation, you should consult with qualified cross-border tax professionals. 
• All dollar amounts noted in this reference guide are reported in US currency (US$). 

This is a quick list of what us discussed in detail in the reference at the end.

What is US Situs Property? 

Under the US Internal Revenue Code, US situs property includes the following: 

• real estate located in the US 
• tangible personal property located in the US 
• US mutual funds.

Note that certain assets are considered not to be US situs assets, such as the following: 

• cash in a US bank account maintained for personal purposes only (other than cash in a US brokerage account) 
• certain exempted portfolio debt obligations 
• most government bonds, treasury notes and treasury bills issued by the US government or a US state or political subdivision, and 
• proceeds of a life insurance policy, even where payable by a US insurance company. 

How US estate tax applies to the estate of a Canadian resident? 

In Canada, a person who dies is deemed to have disposed of all of his or her capital property at the fair market value of the property just prior to death (unless the property is transferred to a spouse or common-law partner or to a qualifying spousal trust or common-law partner trust). This can give rise to significant capital gains tax payable on death. 

The US has a different method of taxation on death. 

The Canada-US Tax Convention 

For deceased Canadians who were non-residents of the US, the Canada-US Tax Convention (the “Treaty”) applies to provide some relief from US estate tax. Under the Treaty, Canadian residents benefit from the same unified tax credit as for US citizens, except that the tax credit is prorated, based on the value of the deceased’s US situs assets compared to the gross value of the deceased’s worldwide assets. 

Valuing assets for purposes of US estate tax 

It is important to keep in mind that the value of your assets, for the purposes of US estate tax, is determined in accordance with US rules. This can lead to some unexpected results. For example, unlike the rules in Canada, your estate would include the value of certain property that you transferred in the three-year period prior to your death. 

Tax credit in Canada for US estate taxes paid 

While Canada allows a tax credit for foreign income tax paid on foreign-source income, this tax credit is not available for US estate tax paid since it is not an income tax. However, some potential tax relief may be available under the Treaty. 

Minimizing your US Estate tax exposure 

There may be some tax planning strategies available to minimize US estate tax. However, in considering these strategies, it would be very important to obtain professional cross-border tax and legal advice to ensure that the strategy is appropriate in your situation and that the complexity, costs and risks involved are properly weighed or assessed. 

Possible strategies include: 

• Marital Credit
• Non-Recourse Mortgage
• Charitable Donations

Other Possible Strategies

• Owning US assets jointly 
• Split interest purchase. 
• Holding US property through a Canadian trust 
• Holding US assets through a Canadian corporation 
• Holding US property through a Canadian partnership

US gift tax & US generation skipping transfer tax 

It is possible that US gift tax and/or US generation skipping transfer tax could apply in certain circumstances. Professional advice should be obtained when you are considering gifting US situs property. 

Conclusion 

If you are a Canadian who owns US situs property, US estate tax may be payable on your death. However, with proper planning, in consultation with qualified cross-border tax advisors, it is possible that this potential tax liability could be reduced. 

There are many complex issues and options to consider when dealing with the interaction of Canadian and US taxation. This is only a very brief overview of one aspect of these issues. We recommend that you obtain advice from qualified cross-border tax advisors to ensure that you optimize your Canadian and US tax situation..