Canadians often misunderstand (or are unaware) that the U.S. estate tax may apply to their estate.  Indeed, if a Canadian dies owning U.S. situs assets with a gross value exceeding USD $60,000, their estate will have to file a U.S. estate tax return and, depending on the worldwide fair market value of their estate, could be subject to U.S. estate tax.

From an estate administration perspective, one of the challenges for the non-U.S. executor is accessing and administering the U.S. situs assets. This is because most U.S. financial institutions will require a copy of the U.S. federal transfer certificate (“FTC”) before transferring legal title of the assets to the estate or to the estate’s beneficiaries. The FTC is the equivalent of the CRA’s clearance certificate.

What is a U.S. situs asset?

Advisors ought to appreciate that U.S. situs assets consist of:

• S. real estate,
• S. tangible property,
• Safety deposit boxes located in the U.S.,
• S. brokerage accounts,
• S. publicly traded securities (even if held in a Canadian registered account),
• Shares in a private U.S. corporation,
• Debts owed by a U.S. debtor,
• Shares in a U.S. registered fund/mutual fund,
• Interest in a U.S. partnership.[1]

Any of the above assets will be considered a U.S. situs asset and if the cumulative fair market value of those exceeds, USD $60,000, the estate advisor needs to consider the U.S. estate tax implications involved during the estate plan.

Process to obtain FTC

To obtain the FTC, the Canadian executor must file Form 706-NA[2] within nine (9) months from the date of death.[3] The Internal Revenue Service (“IRS”) is clear that the FTC will be issued only after Form 706-NA is filed and it’s satisfied that the estate tax payable by the estate, if any, has been fully discharged or provided for. The tax will be considered fully discharged for purposes of the issuance of a transfer certificate when the investigation has been completed and payment of the tax, including any deficiency finally determined, has been made. Further, the IRS estimate a time frame of six (6) to nine (9) months for the issuance of the FTC.[4] One can appreciate this process is time consuming and may result in considerable delays in the administration of the estate.

If the value of the U.S. situs assets is less than USD$60,000 and there is no U.S. estate tax payable by the estate, the executor may obtain an FTC while avoiding filing the Form 706-NA as long as specific documents are provided; such as a copy of the death certificate, a copy of the Last Will of the deceased, a copy of the final tax return in Canada for the deceased, and an affidavit of the executor, sworn before a Notary public, providing the specific information required by the IRS.

Cross-Border Estate Is A Challenge For The Executor

In practice, most U.S. financial institutions will refuse to take instructions from the non-U.S. executor or the beneficiaries. Therefore, the executor has no authority to access nor manage the assets until the FTC is issued and a copy is provided to the U.S. financial institution. What if the value of the investments decreases prior to the issuance of the FTC? Can the executor be held liable? Possibly if any delay can be attributable to the executor’s negligence.

Cross-border estate and tax advisors are aware of the U.S. estate tax compliance and requirements. In the context of cross-border estate administration, seeking professional advice early will expedite the U.S. tax administration of the Canadian estate and possibly avoid any claim of executor’s negligence.

NB: If the deceased owned U.S. publicly traded securities, the U.S. financial institution may also request a Medallion Signature Guarantee (“MSG“) along with the FTC. The MSG is a confirmation that the signing party is the appropriate person to endorse the securities and has the legal capacity to sign. The executor may need enquire early with the U.S. financial institution as to whether it will require an MSG with the FTC.

 

 

[1] For determining whether the U.S. partnership is a U.S. situs asset, a more in-depth analysis is required.

[2] Form 706-NA is the estate tax return to be filed for the non-resident decedent.

[3] An automatic six-month extension of time will be granted if Form 4768 is filed on time.

[4] In reality, the timeline for the issuance of the FTC will likely be greater than nine (9) months because of the IRS backlog.