As winter finally sets in for us Canadians and our Canadian snowbirds begin to head south, we often see an increase in interest among our clients with the concept of owning a home in the southern USA. While the Canadian dollar may make this somewhat unattractive at the moment and perhaps for the foreseeable future given some recent forecasts, there will always be deals to be had and emotional decisions to be made. As a result, I take this blog as an opportunity to remind readers of the implications of owning a US vacation property.
As a Canadian resident taxpayer who is not a US citizen, you may be required to pay US estate taxes if you own a US vacation property at the time that you pass away. There are some thresholds you have to cross before this becomes an issue. First, if the US vacation home is valued at less than US $60,000 when you pass away then this will not be an issue. Secondly, if the value of your worldwide estate is less than the exempt amount in the year of your passing, currently at US $5.45 million for 2016, then this will also not be an issue. It’s worth noting that the US $5.45 million is the indexed exempt amount for 2016 that is available due to the American Taxpayer Relief Act of 2012. This Act established the base exempt amount of US $5 million at that time. If neither of these facts applies to you, then there may be an issue.
The important point to take away from this blog is plan before you buy.
I always recommend to clients that as they begin to go shopping, they should also speak with their US and Canadian advisors about the ways ownership can be planned to so reduce exposure to this US tax liability. This is particularly important given the US estate tax regime is buttressed with a gift tax regime that may result in a US tax liability if planning is done after you own a US vacation property. [There are also Canadian income tax issues to address due to our deemed disposition rule and foreign tax credit relief.]
So what are some options to think about.
First, ownership through a Canadian corporation is no longer an option due to the shareholder benefit rules which may result in a Canadian tax liability.
While it is common to own real property in Canada between spouses as joint with right of survivorship, this is generally not the ownership option of choice for Canadians to own a US vacation property. Rather, consideration should be given to maximizing the credits that are available for US estate taxes. Typically this favours having the property owned by the spouse whose overall estate value is lower. Depending on the estate values of both spouses and the value of the US vacation property, it may be possible to avoid or reduce the amount of US estate taxes through the ownership arrangement.
Another possible option is to reduce the value of the US vacation property by obtaining a non-recourse mortgage, as this will reduce the value of the vacation property for US estate tax purposes. The extent of reduction in value will, of course, depend on what an arm’s length lender is willing to lend. Where reliance may need to be had on a non-arm’s length lending arrangement, then it will be important that interest is paid to the lender.
Where either of the foregoing options is not available, establishing a discretionary family trust to acquire the U.S. vacation property is an option. While there are Canadian tax issues to consider, such as the 21 year deemed disposition rule, if properly structured the U.S. estate tax can be avoided for both spouses. Fundamentally though, the spouse who is providing the financial contribution to the trust to acquire the property has to be comfortable with (i) having gifted the financial contribution to the trust without any ability to receive the financial contribution back, and (ii) not having any mandated rights to use the property during his or her lifetime.
So as you Canadian snowbirds begin to fly south again, if you are considering acquiring a vacation “nest” in your sunny US destination, please plan before you buy.