All About Estates

U.S. Estate tax exposure – it’s political!

The 2020 U.S. election is over and the votes have been tabulated, and in some counties the votes have even been tabulated more than once.   Unless there is some Republican wild card waiting to be plucked out of the proverbial magic hat, then Joe Biden will be inaugurated president of the United States on January 20, 2021, and with President Biden comes a proposed change in tax policy.

The headline on President-elect Joe Biden’s website reads “A tale of two tax policies: Trump rewards wealth, Biden rewards work”. Now we are not going to get into political mud slinging between Democratic and Republican tax policies, but we are going to focus on one potential Democratic tax policy related to estate taxes as this will effect U.S. Citizens residing in Canada and Canadian citizens with U.S. situs property. On Joe Biden’s website, he proposes to return the estate tax exemption and tax rate back to the 2009 level to help fund a comprehensive 12-week paid family and medical leave program. Returning the estate tax to 2009 levels would result in a decrease in the current estate tax exemption of $11.58 million to $3.5 million and an increase in the estate tax rate from 40 to 45 per cent.

In 2020, if you are a U.S. Citizen, resident in Canada, with an estate value not exceeding US$11.58 million, you are not subject to estate tax.  Any estate value in excess of this amount would result in estate tax at a rate of 40 per cent.  If the 2009 estate tax levels are brought back, then a 45 per cent estate tax would be applied to the value of an estate in excess of US$3.5 million.  As a result, our U.S. Citizen with an estate value of US$11.58  million could be faced with an estate tax exposure of approximately US$3.6 million.

There are many Canadian residents who are not U.S. Citizens thinking (for remaining blog – referred to as Canadian residents) that they are immune to U.S. estate tax, but that may not be the case if they own U.S. situs property.  For starters, if a Canadian resident owns U.S. situs property worth more than US$60,000 then there is a requirement to file a U.S. estate tax return (form 706-NA).  This does not necessarily mean that they will owe U.S. estate tax because the Canada-U.S. Tax Treaty allows them to also have access to the estate tax exemption.  While the exemption is similar to that available to U.S. citizens, the amount of the exemption available to a Canadian resident is prorated based on the ratio of the value of U.S. assets at death to the value of the worldwide estate.  For example, in 2020 if a Canadian resident owned a US$1 million U.S. vacation property and had a worldwide estate value of US$15 million then the estate tax (with the pro-rated exemption) would be $40,613.  In this same example, assuming President-elect Joe Biden reverts the estate tax exemption and tax rate back to the previous level in 2009, then the Canadian resident would have an estate tax liability of $247,747.  This is a potential increase in our Canadian resident’s estate tax exposure of approximately $207,000. This increased estate tax exposure is relatively small compared to our U.S. Citizen neighbour, but it still hurts.  Especially due to the fact that Canadian residents do not get to vote.

Now before we all jump on the band-wagon and start executing U.S. estate planning to avoid this potential increase in estate taxes, the Democratic party still has to pass various hurtles.  First, the electoral vote on 2020 has to result in Joe Biden being elected as President.  Most scholars and legal professionals anticipate that this is all but guaranteed.  Then the formality of inauguration on January 20, 2021 must happen.  From there President Biden’s main focus will be on getting control of COVID-19, so it would be unlikely that tax policy will be top of mind.  Of course, the Democrats can introduce any law they want, but currently they only control the House of Representatives.  Without control of the Senate, it will be very difficult to get some of Biden’s tax policies enacted into law.  On January 5, 2021, Georgia will have an election for two of the State’s Senators.  If both of these run-off races go Democrat blue then the Democrats will gain control of the Senate[1].  With control of the Senate, House of Representatives and the White House, the Democrats would have the power to propose and enact any bills they want.

Stay tuned as this story is just getting started.

[1] In actual fact, both Republicans and Democrats would each have 50 seats resulting in a deadlock, but the Vice-President Kamala Harris would retain the deciding vote in the event of a tie effectively giving the Democrats control of the Senate.

About John Oakey
National Tax Director for Baker Tilly Canada. John has extensive experience with Canadian corporate and personal income taxes with specialization in the areas of corporate reorganizations, estate planning, succession planning and tax compliance. He also has significant experience dealing with GST/HST issues and U.S. citizen cross-border tax reporting issues.


Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.