“securities held in a Canadian brokerage account or registered plan are considered to be U.S. situs property”
It is generally known that U.S. citizens, Greencard holders and domiciliaries are subject to U.S. estate tax on the fair market value of their worldwide assets on death. For 2015, the U.S. estate tax applies on the value of taxable estates in excess of U.S. $5,430,000 at a rate of 40%.
It is also fairly well understood that Canadians with U.S. vacation properties, commercial real estate and, in some cases, business interests may be subject to U.S. estate tax based on the fair market value of the properties at the date of death. Canadians will also be subject to Canadian income tax on the capital gains on these assets, on the date of death. There may be some credit against the Canadian income tax for the U.S. estate tax. Given that the estate tax rate is 15.5% higher than the Canadian capital gains tax rate (and is charged on the value of the estate, not just accrued gains) the reality is a 40% tax on the value of U.S. based (“U.S. situs”) assets, for Canadians.
Think you don’t own any US situs assets just because you don’t own U.S. real estate? Not so fast! U.S. securities held in a Canadian brokerage account or registered plan are considered to be U.S. situs property for U.S. estate tax purposes. Canadians who have absolutely no links to the U.S. (either by citizenship, domicile, Greencard status or owning property located in the U.S.) can end up with a significant unexpected tax bill just because their Canadian investment portfolio is diversified and , includes U.S. securities. As noted above, with U.S. estate tax as high as 40% on the full fair market value of the U.S. assets, it is much higher than the Canadian tax of approximately 24.5% on the capital gain (not fair market value).
There are exemptions from U.S. estate tax, essentially, for Canadians whose worldwide assets (not just U.S. situs assets) do not exceed U.S.$5.43 million of value (for 2015). Even though this amount is indexed to inflation, when you factor in the home, a vacation property, the family business and investments that have accumulated over the years, it is not uncommon for Canadians to exceed this limit. If the fair market value of U.S. securities is say, $750,000 US and the Canadian’s total assets (including these securities) is $6,000,000 US the potential U.S. estate tax would be U.S. $248,300 in 2015. There may be an available spousal rollover but this conclusion should not be taken for granted.
There are ways for Canadian (who is not U.S. a citizen, Greencard holder or domiciled in the U.S.) to avoid this unexpected U.S. tax surprise. Owning the assets through a trust may help but is quite complicated. A simpler solution is to transfer the offending securities, tax free, to a Canadian corporation. The shares of the Canadian company are not U.S. situs property even though the company’s investments are. The corporation doesn’t die when the shareholder does. However, one must also consider the tax consequences of owning the investments in a Canadian corporation. There is potential for double taxation in Canada. With proper post-mortem planning, however, this exposure can be minimized.
With tax season around the corner, taxpayer’s will be providing the details of their investment portfolios to their tax preparers. There’s no better time to for advisors to identify the risk of exposure to U.S. estate tax exposure. Failure to do so can be very costly.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.