As many Canadians own property in the United States, as well as investments in the U.S. financial markets, it is important to be aware of the potential estate tax implications. Even thought a taxpayer is a non-resident of the U.S., they can still be subject to estate taxes. It is important to plan for the future and discuss estate issues with your tax professional. These issues include all U.S.-situs and U.S. sourced assets held by non-resident individuals. We can also assist you to determine your estate tax exposure.
AG Tax experts have prepared this brief overview of the U.S. estate tax laws. This includes applicable rules on U.S. assets held by non-resident aliens/foreigners.
Overview of U.S. Estate Tax
U.S. estate tax arises on the death of an individual and is applied at graduated rates to the value of the individual’s taxable estate. The same rates apply whether the individual is a U.S. citizen, a U.S. resident, or a non-resident of the U.S.. There is however, a different rate for non-residents. This rate includes the value of the property in the U.S. or connection and is included in calculating the estate that is subject to tax. The rate is graduated depending on the value of the estate. The highest graduated rate is 40% of amounts exceeding $1 million.
US Estates for Non U.S. Owners of US Property
Unlike Canada who only taxes gains and loss at death, the U.S. imposes estate tax on the fair market value (FMV) of assets owned at death. Non-residents and non citizen individuals will be taxed based on the fair market value of the U.S.-situs property. This includes but is not limited to: U.S. located vacation property, U.S. located business property and U.S. investments such as U.S. securities held in U.S. or Canadian brokerage accounts (including RRSP’s).
U.S. citizens and residents are entitled to a “unified credit”. This credit exempts a portion of the estate from taxation. The credit represents the tax on the first $5,450,000 for deaths occurring in 2016, this amount is indexed annually. Similar to U.S. citizens and residents, non-residents are also allowed an exemption, although much less. U.S. non-residents are entitled to a “unified credit” which exempts up to $60,000 from a taxable estate. Therefore, if the total value of a U.S.-situs property is less than $60,000 no U.S. estate tax return needs to be filed. This amount has NOT been indexed for over 20 years.
In the case of Canadians, the U.S.-Canada Tax Treaty may provide some relief. Canadians qualify for the same estate exemption (unified credit) on the first $5,450,000 as provided to U.S. citizens and residents. However, they must prorate this amount to their worldwide estate. For example, an individual holds a worldwide estate of $10,000,000, with $1,000,000 in U.S. property. Therefore, the individual is entitled to 10% of the credit. As a result, if an individual’s worldwide estate is less than the total limit ($5,450,000 for 2016), no U.S. estate tax will be payable. To obtain the exemption available under the treaty, the individual must file a U.S. Estate Tax Return with treaty disclosure.
Tax Strategies for Relief from Estate Tax
Tax relief can be available in the form of increased exemption limits due to marriage, treaty-based benefits and foreign tax credits. At times, a taxpayer holds more than the exempted limit or holds an estate which could be subject to significant estate tax amounts. It is best to consult your tax professional for advisory and tax saving strategies based on personal tax situations.
Holding U.S. investments in Canadian corporation, going for a non-recourse mortgage to fund a real estate, or using a property for personal purpose similar strategies are common planning opportunities that may reduce tax burden.
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. We are a team of highly experienced tax professionals with extensive knowledge of U.S. and Canadian cross-border compliance as well as U.S. and Canadian tax laws.
Furthermore, as a full service accounting firm, AG Tax is dedicated to assist you with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Estate taxes, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.