US Citizens and US Permanent Residents in Canada

A US citizen is subject to US federal estate taxes no matter where s/he lives in the world.

Upon death, US federal estate taxes are calculated based on the fair market value of worldwide taxable assets, which  generally includes the value of all of one’s property interests at the time of death.

Under current rules, estate taxes are calculated on an American’s taxable assets at rates of up to 35%. However the estate taxes payable amount is reduced by a exemption on the first USD $5 million of assets, which means that US taxpayers are only subject to estate taxes if their worldwide taxable assets exceed $5 million.

This USD $5 million exemption applies to estate taxes, generation-skipping transfer taxes (GST) as well as gift taxes.

The current rules, which came into law in December 2010, are temporary and will be replaced with much less generous rules slated to return after 2012. Unless those rules change, this exemption will drop to USD $1 million and the top estate tax rates will increase to up to 55% (plus 60% on the portion between USD $10 million and $17.2 million). 

Gifts are integrated into the estate tax regime, and the USD $5 million estate tax exemption is reduced by any gifts which exceed USD $13,000/year made during an US citizen’s lifetime. The gift tax is designed to prevent individuals from gifting assets during their lifetime to their heirs, thereby reducing the estate taxes due on their death.

New rules (known as the “carry over rules”) permit any unused portion of an individual’s USD $5 million exemption to be transferred to a surviving American spouse, which then gets added to their own USD $5 million exemption. Note that this provision is only valid to December 31, 2012, and applies to the exemption amount for estate taxes only. In addition, an individual who has been widowed more than once may only use the most recent spouse’s available exemption amount.

Canadians

Upon death, US federal estate taxes can be due if you own "US situs assets". US situs assets include:

• US real property net of non-recourse debt (including real estate investment properties, country places and condominiums) 
• US personal property (including boats, vehicles)
• Stocks of US corporations incorporated or continued into the US (including those held in RRSP`s and RRIF`s). Note that maintaining a brokerage account in Canada to hold US securities does not avoid exposure to US Estate Tax
• Debts of US companies and persons

Excluded assets include:

• US bonds
• US bank accounts
• US life insurance policies (excluded but included in the world wide assets values)
• Canadian mutual funds which hold US investments

Canadians who die holding US situs assets in excess of USD $60,000 are subject to US federal estate taxes, which are calculated on the total value of their US situs assets at a rate of up to 35%.

However the estate will be reduced by an exemption of USD $5 million x the ratio of US situs gross assets over worldwide assets.

Therefore if a Canadian dies with US situs assets making up 50% of their USD $8 million of world assets, they will have an exemption of:

     USD $5 million x $4 million/$8 million = USD $2.5 million.

On death, a Canadian will generally pay taxes in Canada on any accrued gains on US assets on their terminal Canadian income tax return. Depending on the specifics, the Canadian Revenue Agency (CRA) will permit a foreign tax credit to be claimed and applied in Canada for the US estate taxes paid on those assets. However the provinces generally do not allow a foreign tax credit for US estate taxes paid and, as a result, the estate may be subject to some double taxation at the provincial level.

The filing deadline for a US estate tax return is generally nine months after the date of death. 

Planning for Estate Tax Liabilities

If your estate is potentially subject to US estate taxes, there may be planning strategies available to reduce your US estate tax exposure. Contact us if you require assistance analyzing your exposure to US estate taxes, and how this liability can be reduced.

Notice

US estate tax rules are complex and no planning actions should be taken without first consulting with a qualified tax adviser.

Please contact Jonathan Levy if you have any questions or comments.

IRS Information

For additional information from the IRS click here.