So you are a Canadian citizen and resident, surely ‘Uncle Sam’ has no right to your Estate on your death. Unfortunately ‘Uncle Sam’s’ arm – his estate tax arm that is – can reach across the border to impose taxes on the Estate of a non-resident/non-citizen of the United States.
For US estate tax purposes, a Canadian citizen and resident will have a taxable estate to the extent they own property that is situated in the United States. That is to say, they will be taxed on the fair market value of all US situs property that they own on their death. US domestic law does allow certain deductions for debts and other expenses. The difficulty is that the value of those deductions is based upon the proportion that their US situated property is of their worldwide estate – the smaller the proportion, the smaller the extent of the deductions.
Examples of US situs property are:
- real property and tangible personal property situated in the US
- US mutual funds including money market funds
- US securities
- certain US debt obligations
- certain trust interests if the assets held by the trust are situated in the US.
Some property that might be considered to have a US situs is excluded. For example, US bank deposits are not included in US situs property.
There is some relief available. For instance, US domestic law does provide a Canadian citizen/resident with a unified credit of US $13,000. This will shelter US $60,000 of US situs property from US estate taxes. Where a Canadian’s US situs estate is greater than this amount, s/he must look to the Canada-US Tax Treaty for relief.
The Canada-US Tax Treaty permits a Canadian to benefit from the same unified credit that a US citizen/resident has. Recall from my October 26, 2010 blog, at the end of 2009 the unified credit would shelter US $3.5Million of taxable estate. Unless Congress takes action before the end of 2010, however, the unified credit will revert back to its 2001 level. This will mean that the unified credit will only shelter US $1Million of taxable estate. However, like the proration that applies to the deductions that are available under US domestic law, the unified credit available to a Canadian is prorated based on the proportion that their US situs assets are of their worldwide estate – the smaller the proportion, the smaller the amount of the unified credit.
The example below will hopefully help clarify matters.
Assume Congress takes no action before the end of 2010 so the unified credit returns to US $1Million. John, a Canadian citizen/resident, dies in 2011. At his death, he owned a home in Arizona worth US $400,000 and had a total worldwide estate of US $3.2Million. John’s estate would benefit from a unified credit on US $125,000 of US situs assets (US $400,000/US $3.2Million x US $1Million). US estate tax would be payable on US $275,000 of the Arizona home. The US estate tax that would be payable would be US $78,575 calculated as follows:
|$400,000 of US situs property|
|Tax on first $250,000||$ 70,800|
|Tax on next $150,000 at 34%||$ 51,000|
|Total Estate taxes||$121,800|
|Unified Credit x US situs/worldwide estate$400,000/$3,200,000 x $345,800||$43,225|
|US estate taxes owing in 2011||$78,575|
There are some planning options that can be utilized to help reduce or defer the payment of this tax. Some of those options include owning US situs investment assets through a Canadian corporation, using a non-recourse mortgage to finance the acquisition of US situs real property, life insurance, if ownership is appropriately structured, to pay the liability, using certain trusts and limited partnership structures to own US situs assets, obtaining exposure to US situs investment assets through a Canadian mutual fund and otherwise reducing your worldwide estate.
Hopefully Congress will bring us all a Christmas present this year by maintaining the unified credit at the level it was at in 2009.
Corina S. Weigl