Do you own U.S. real estate? Do you own shares of U.S. companies in your Canadian investment accounts? If you answered yes to either of these questions, or own other U.S. assets, you may have exposure to U.S. estate tax.
A Canadian (i.e. a non-U.S. citizen and a non-U.S. resident alien) would generally be considered as a non-U.S. domiciliary for U.S. estate tax purposes. The determination of domiciliary is based on the facts and circumstances in each case and further discussion is beyond the scope of this article.
As a non-U.S. domiciliary, Canadians may be subject to U.S. estate tax on any U.S. situs assets held at the time of their death. U.S. estate is applied at graduated rates based on the fair market value of the U.S. assets owned subject to certain exemptions discussed in further detail below.
Generally, U.S. situs assets refer to assets situated in the U.S. The most common U.S. situs assets include U.S. real property, certain debt obligations within the U.S., securities or stock options of U.S. corporations (including securities held within an RRSP/RRIF, TFSA and RESP), and tangible personal property in the U.S.
There are certain U.S. situs assets that are exempt from U.S. estate tax. For example, U.S. bank accounts, U.S. treasury bills and Canadian mutual funds with investments in U.S. securities are considered to be non-U.S. situs assets.
Under U.S. domestic law any Canadian with U.S. situs assets is entitled to a minim USD $60,000 estate tax exemption.
Canadians with U.S. situs assets with a value greater than USD $60,000 may be able to take advantage of further estate tax exemptions available under the Canada-U.S. Income Tax Treaty (the “Treaty”).
The Treaty allows a Canadian to access the exemption amount that is available to U.S. residents. For 2017, the exemption amount is USD $5,490,000. Note, however, that the exemption is prorated based on the ratio of the value of the Canadian’s U.S. situs assets compared with the value of the Canadian’s worldwide gross estate (calculated under U.S. rules).
Small Estate Exemption
Under the Treaty, the there is also an exemption from U.S. estate tax for a Canadian resident with a worldwide estate value of less than USD $1,200,000. This exemption does not apply where the Canadian’s U.S. situs assets consist of real property, resource property and business property situated in the U.S. and is really only useful U.S. where the effective estate tax exemptions is less than USD $1,200,000.
The Treaty also provides an additional exemption equal to the annual exemption amount (currently USD $5,490,000) where U.S. situs assets are transferred to a surviving Canadian spouse. This effectively increase the exemption amount to USD $10,980,000. Note that where U.S. situs assets are transferred to a U.S. citizen spouse there is an unlimited marital exemption.
Foreign Tax Credit
To the extent that there is still U.S. estate tax payable on death the Treaty provides further relief by allowing the U.S. estate tax to be claimed as a foreign tax credit against any Canadian income tax payable in the year of death.
Filing of return
U.S. estate tax returns (Form 706NA) should be filed within nine months of the decedent’s death unless an extension is granted by the Internal Revenue Service (“IRS”).
Gift Tax and Generation-Skipping Tax:
If you are thinking of transferring the property to your spouse, children or grandchildren during your lifetime, be sure to speak with an accounting professional before you do so as the transfer may be subject to a gift tax or generation-skipping tax.
Planning for Estate Tax
Canadians with worldwide assets in excess of the annual exemption amount may still have exposure to U.S. estate tax. Although beyond the scope of this article, certain planning can be put in place to reduce or mitigate the potential estate tax liability for these estates.
By: Cathy Wong and Dan Roberts, Wolrige Mahon LLP