U.S. tax and estate planning for Canadians
This guest post is the result of a charitable project (Blogging for Charity) started by my friend Mark Goodfield, also known as the Blunt Bean Counter. My friends at Financial Services Group (Gary, Scott, and Jennifer) were wonderful to bid $500 for the winning bid. Thanks to Financial Services Group for making the donation to the Yih Charitable Giving Fund through the Edmonton Community Foundation.
A time for conversation?
by Jennifer Tweddle, BA, CFP, CLU, CHS
Few adjacent countries share the friendly relations, common language, and customs that we share with the U.S. Although we have much in common there are significant differences in the two tax systems. Careful tax planning is required in cross – border transactions for example, where Canadians* purchase U.S. property and investments. The purpose of this article is to raise awareness about one of those important differences. As always, specialized legal and accounting advice should be obtained before actions are taken or decisions made as each situation is unique on its facts.
Who gets taxed? Residents or citizens?
Canada taxes its residents, regardless of citizenship, on their worldwide income. The U.S., taxes its citizens, regardless of where they live, on their worldwide income. In addition, the U.S tax system can subject Canadians to U.S. tax on U.S. source income and on the value of certain assets at death.
What happens at death?
On death, here’s the problem for Canadians owning U.S. assets. Canada deems all property to be disposed of at fair market value immediately before death and income tax is payable on the deemed gain. However, there is an important exemption for assets left to a spouse or qualifying spouse trust.
In contrast, the United States imposes an estate tax on the fair market value of the deceased’s worldwide taxable estate. In the case of Canadians, these rules limit the “taxable estate” to certain U.S. situs property which includes, among other things, U.S. stocks and U.S. real estate interests such as vacation homes. U.S estate tax rates are significant. They start at 18% and quickly rise to 35% of the taxable estate.
Where both taxes apply, there may be a double tax because the two systems use different methods – Canada taxes gain, the U.S. tax value. The two taxes might also arise at different times if the assets are subject to U.S. tax in the year of death but Canadian tax is deferred because the assets were left to a Canadian spouse.
While the tax agreement between Canada and the U.S. does not solve the problem, it does offer some relief by way of:
- Access to a special “unified credit” such that no US estate tax would be payable if the worldwide assets of the deceased were $5 million or less in 2011 (more on this later).
- A “spousal credit” which provides limited relief from U.S. tax on certain assets left to the deceased’s spouse.
- A possible credit in Canada for certain U.S. taxes paid on U.S. source income including gains.
Prospective changes in the U.S. estate tax exemption limit would reduce the exemption from $5 million to a very modest $1 million in 2013. As a result, even more, Canadians owning U.S. assets could be exposed to U.S. estate tax.
While the tax environment surrounding ownership of U.S. assets has always been challenging, the changing environment will make it more so. If you own U.S. assets or are considering the purchase of U.S. assets, now is a good time to talk with your professional advisors to explore your planning options.
*In this article “Canadians” refers to Canadian residents who are not U.S. citizens or residents, have never lived in the U.S. and who do not hold (nor have never held) a U.S green card.