Dear Canadian Residents – Your estate might be subject to U.S. estate tax!
Most Canadians believe they are far from any exposure to U.S. estate tax because they live outside the U.S. This simple assumption is wrong.
Canadian residents that are not U.S. citizens are subject to U.S. estate tax based on the value of their U.S. situs assets they hold at death (such as U.S. real estate, U.S. stocks – held in a registered account or not -, U.S. life insurance policies, U.S. golf equity membership, U.S. registered vehicles, etc.).
If you are a Canadian tax resident and you own U.S. assets, this article will help you realize you could save on unnecessary taxes and future estate settlement costs. Your beneficiaries will appreciate you taking the time to maximize your estate!
As a Canadian tax resident, U.S. estate tax applies on your U.S. situs assets held upon your death. The estate tax begins at a rate of 18% on the value of all U.S. situs assets and increases to a top tax rate of 40% on the value that exceeds USD$1 million. Note: Value, not capital gains.
Fortunately, various credits can reduce and even eliminate that tax liability. Your estate would be entitled to a limited unified credit of US$13,000 (which exempts assets worth USD$60,000) or the basic unified credit provided under the tax treaty between Canada and the United States, whichever credit is higher. The credit under the tax treaty provides an exemption similar to the one available to U.S. citizens and residents (which was recently increased by the U.S. tax reform to $ 4,417,800 for the 2018 taxation year), but this exemption is prorated based on the ratio of the value of the U.S. situs assets over the value of your worldwide estate. In addition, the unified credit under the tax treaty can be doubled if assets are left to a surviving Canadian resident spouse. When assets are left to a U.S citizen spouse, the unlimited marital deduction essentially defers a portion or all of your U.S. estate tax liability to your surviving spouse.
After calculating the value of your U.S. situs assets and value of your worldwide estate, both in USD, you will be able to estimate your U.S. estate tax liability and applicable tax credits. If you consider that your estate is not exposed to U.S. estate tax, your estate may still have a U.S. estate tax filing requirement. In fact, if you held U.S. situs assets worth USD$60,000 or more, your estate is required to file a U.S. estate tax return (Form 706-NA and statement to claim tax treaty benefits) no later than nine months following your death. This filing requirement is applicable even if no U.S. estate tax is payable after applicable credits. In certain cases, transfer agents of U.S. situs assets may simply not agree to transfer assets to the estate until the estate can prove clearance from the Internal Revenue Service.
In summary, you could be in one of the three following situations:
- If your U.S. situs assets are worth USD$60,000 or less: You are not subject to U.S. estate tax and your estate does not need to file a U.S. estate tax return.
- If your U.S. situs assets are worth more than USD$60,000 and your worldwide estate does not exceed $11.2 million: Because of the prorated unified credit provided under the tax treaty, you will not be subject to U.S. estate tax if the value of your worldwide estate does not exceed $11.2 million. However, your estate will be required to file a US estate tax return to claim the treaty benefits.
- If your U.S. situs assets are worth more than $60,000 and your worldwide estate exceeds $11.2 million: Your estate will need to be a U.S. estate tax return to claim treaty benefits and pay U.S. estate tax.
The recently increased basic exemption, enacted on December 22, 2017, will be applicable as from the 2018 taxation year but is meant to expire at the end of 2025. If no permanent legislation is enacted or other government changes arise until then, U.S. estate tax exemption levels will revert to what they were in 2017.
Because of the uncertainty of the future of the U.S. estate tax legislation, reducing your exposure to U.S. estate tax should remain an important aspect of your estate planning. We recommend that you assess your exposure as soon as possible and consider the various planning options that are available to minimize your exposure to U.S. federal and state estate taxes.