If you own U.S. assets, including real estate and stocks, you should be aware of the U.S. Estate Tax - even if you are not a U.S. resident.
The U.S. government may levy an estate tax on the fair market value of property located in the U.S., even if it is owned by a non-resident. Furthermore, U.S. states may also impose a probate tax at death based on the value of real estate located in that state. To avoid state probate tax, some cross-border experts will recommend owning the U.S. real estate through a revocable living trust.
For tax years 2010 to 2012, U.S. Estate Tax ranges from 18-35% of the fair market value of the U.S. assets, with an exemption amount of US $5 million. In 2013 if no further legislation is enacted, the estate tax rater will increase to 55% and the exemption amount will be reduced to only US $1 million.
U.S. Estate Tax thresholds
For deaths in 2010-2012, Canadians should keep these two thresholds in mind:
1. US $60,000 - If your U.S. assets (typically U.S. real estate and U.S. stock) are US $60,000 or less on death, then there would be no U.S. Estate Tax payable regardless of the value of your worldwide assets.
2. US $5 million - If your worldwide estate is US $5 million or less upon death, then there would be no U.S. Estate Tax payable regardless of the value of U.S. assets.
If your worldwide estate is greater than US $5 million upon death then there could be U.S. Estate Tax on the value of U.S. assets.
Reducing your U.S. Estate Tax liability
In addition to making alternative investment choices which are not subject to U.S. estate taxes, there are legitimate strategies to minimize or eliminate the U.S. Estate Tax such as:
Purchasing U.S. real estate (and other assets like U.S. stocks) through a Canadian corporation, trust or partnership. There are pros and cons to all three of these structures but in particular you should be cautious about purchasing new U.S. real estate (after December 31, 2004) through a Canadian corporation.
Having a "non-recourse" mortgage against your U.S. real estate - this special type of mortgage reduces the value of U.S. real estate subject to U.S. Estate Tax dollar for dollar.
Gifting U.S. situs assets prior to death. For Canadian residents who are not U.S. citizens and not green card holders, there is generally no U.S. gift tax when intangible property such as stocks, bonds and cash are transferred to another individual (although be careful of making gifts of cash from U.S.-based financial institutions). However, U.S. gift tax does apply to Canadians that gift real estate and other tangible property located in the U.S., if the value exceeds certain thresholds. For example, if the total value of all gifts of U.S. property to any individual is US $13,000 or less (2010, 2011 threshold) in a given year, these gifts will not attract U.S. gift tax. Where the gift is made to a spouse who is not a U.S. citizen, the threshold for gifts made is US $136,000 for 2011. Also, a gift of an appreciated property to anyone other than a spouse is a disposition at market value for Canadian tax purposes that would trigger an unrealized capital gain that is taxable in Canada.
Using life insurance. Some Canadian residents use life insurance to pay for any capital gains tax arising on their death due to our deemed disposition rules. Similarly, one of the simplest methods to pay for potential U.S. Estate Tax is to maintain sufficient life insurance to cover this liability on death. Life insurance costs will depend on your age and health. You should consider the effect it may have on your exposure to U.S. estate tax. Ironically, for purposes of calculating the value of your worldwide estate you must include the amount of the death benefit if you have incidents of ownership within the policy (generally meaning you had the ability to: name or change beneficiaries, borrow against the policy, access the cash value or assign or cancel the policy). Therefore, purchasing a life insurance policy can potentially increase your exposure to U.S. estate tax. If obtaining life insurance will increase your exposure to U.S. estate tax, you should consider whether it makes sense for you to hold the policy in a special Irrevocable Life Insurance Trust (ILIT). With an ILIT you do not own the life insurance policy outright; a trust owns the life insurance policy such that you do not have incidents of ownership.
For more information, please contact us at (604) 257-7455. Ask us for a copy of the article titled "U.S. Estate Tax."
This article is supplied by Colin MacAskill, a vice-president and an investment advisor with RBC Dominion Securities Inc. This article is for information purposes only. Please consult with a professional advisor before taking any action based on information in this article. Colin can be reached at 604-257-7455.
