This blog has been written by Mohena Singh, Associate at Fasken LLP.

Last week I had the opportunity to attend the South Asian Bar Association North America Conference here in Toronto. The conference included three days of programming, meeting lawyers from across the continent and participating in conversations revolving around issues concerning the South Asian community.

As a part of the programming, I moderated a panel on cross-border estate and tax planning issues affecting immigrant families, alongside Rahul Sharma (Fasken), Reshma Shah (Duane Morris LLP) and Josh Kumar (Aird & Berlis LLP). The panel first discussed the growing need for estate planning for this demographic and then analyzed scenarios that are commonly encountered by estate planners.

A short synopsis of the scenarios that were discussed on the panel is provided below.

Scenario #1: Spouses of Different Citizenships

The first scenario the panel considered was when there are spouses of different citizenships that hold property in the jurisdiction of their citizenship and are residents of Canada. The question in this case would be what would be the tax implications on the death of a spouse. It is important to know that each spouse would be under a different tax regime. Under subsection 70(5) of the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.) (“ITA”), a taxpayer is deemed to have disposed of all their capital property immediately before death for proceeds equal to fair market value, as of the date of death. However, a deferral of taxes can be achieved when there is a surviving spouse in which case, assets are transferred at cost. Therefore, from a Canadian aspect, there could be no tax implication to a surviving spouse.
On the other hand, in the United States, US citizens and any US domiciliary are subject to the US estate tax on the gross value of their worldwide estate, with a US estate tax exemption applicable to the value of the worldwide estate. Currently the US estate tax exemption limit is $13.61M. This would mean that any property in Canada jointly owned by the spouses would be included in the value of the US spouse’s worldwide estate.
This scenario highlights the importance of tax planning for spouses of different citizenships as two separate tax regimes are involved, each having their own set of rules and tax implications.

Scenario #2: Canadian Estates with US Beneficiaries

The next scenario that was discussed was when Canadian estates have foreign beneficiaries, such as US residents and/or citizens. Individuals in this situation need to consider the impact of subsection 107(5) of the ITA which states that for a distribution to a non-resident a capital gain is realized, with exceptions, and there is a requirement to look at withholding and treaty obligations. Not only are there potential tax implications on the Canadian side, US beneficiaries may also have reporting obligations on the US side, as inheritance from a non-US person is subject to US reporting.

Scenario #3: Inherited Assets from South Asian Countries

Lastly, the panel considered the issues around inheriting assets from other jurisdictions, such as South Asian countries. The most important consideration in this scenario is ensuring that the property is properly documented and reported for tax purposes in Canada and/or the US. The panel provided practical examples of the penalties and tax audits that an individual can be subject to if property is not reported correctly and in a timely manner.
There are unique and growing estate and tax planning needs within immigrant families and it is for that reason that we advise individuals who may fall within one of the above scenarios to seek legal and professional advice.

Thank you for reading.