U.S. estate tax
If you are a Canadian resident, non-U.S. citizen, holding U.S. assets and if your world estate is valued at more than US$1,200,000 or your United States realty or business assets are in excess of US$60,000, U.S. estate taxes can impose a very serious burden on your estate.
The application of U.S. Estate Tax to Canadians has changed dramatically through amendments to the income-tax treaty between the United States and Canada. The prior US$60,000 exemption has generally been extended to US$675,000, applied proportionately by the size of your U.S. estate to your world estate. However, great care is required and the rules are very complex.
You Should Also Keep In Mind…
- U.S. securities held in RRSPs/RRIFs are subject to U.S. Estate Tax upon the death of the annuitant since the U.S. tax authorities appear to “look through” RRSPs/RRIFs to the underlying assets on the basis that RRSPs/RRIFs simply represent deposit accounts or perhaps revocable trusts. The annuitant of an RRSP/RRIF may not be entitled to treaty relief and thus may be exposed to double taxation (i.e. any income inclusion will be taxed in Canada and exposed to Estate Tax in the U.S. with nooreign tax credit relief).
- Although subject to some uncertainty, it seems a mutual fund trust that holds U.S. securities will not expose a unitholder to U.S. Estate Tax upon the unitholder’s death. A mutual fund set up as a corporation will avoid U.S. Estate Tax while a mutual fund set up as a trust (most mutual funds are set up as trusts) may avoid U.S. Estate Tax.
- Maintaining a brokerage account in Canada to hold U.S. securities will not avoid exposure to U.S. Estate Tax. (It doesn’t matter where the U.S. securities are held and as a result, U.S. securities held in Canada are still subject to U.S. Estate Tax upon the death of the shareholder.)
If your estate is subject to U.S. Estate Taxes, there are a number of planning strategies available to assist you in reducing your U.S. Estate Tax exposure. For example, holding U.S. assets through a Canadian holding company, or using non-recourse mortgages on U.S. real estate. (Non-recourse mortgages stipulate that the lender has recourse only to the mortgaged property, and not to the mortgagor personally, in the event of default.)
The most effective solution may very well be to simply sell your U.S. assets to other family members or to third parties prior to death. To help ensure the completion of such sale transactions, it is desirable for others to hold Powers of Attorney, effective in the relevant U.S. jurisdictions, in the event you are incapable of following through on your own.
The effectiveness of any of these measures is not clear in law and under no circumstances should action be taken without careful consideration and consultation with experts. There are significant risks and potentially adverse income-tax consequences in both Canada and the United States if these strategies are improperly or inappropriately used.
The information contained in this report was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Merrill Lynch Canada Inc. is not a tax advisor and we recommend that clients seek independent advice on tax related matters. The comments offered here are meant to be general in nature and are not intended to provide legal advice. In addition, legislation in this area is continually changing. Before taking any action, you should seek legal advice to ensure that your planning is appropriate to your personal circumstances and that it is effective in the jurisdiction in which you reside.