“In the Great White North, there’s 5 pin bowling, and in the U.S., there’s 10 pin…”
-Bob and Doug McKenzie
Funny, but that simple phrase sums up the differences between estate taxes in the U.S. and Canada. Like bowling, both countries have a tax that is due upon a taxpayer’s death, it’s the same thing, (a tax) but it’s different. The following is a brief comparison of the death tax systems in both countries.
Having Assets in Canada Versus Having Assets in the U.S.
While there is no estate or inheritance tax in Canada, upon a Canadian taxpayer’s death, they are deemed to have sold their qualifying assets. A final income tax is calculated on the deemed gain on disposition of qualifying assets. Citizenship is irrelevant for this tax, it is based on residency or the location of the assets. The tax is reported on the decedent’s final income tax return.
Upon a U.S. taxpayer’s death, all of their property is valued at its current fair market value, less any deductible expenses and liabilities, and is taxed at estate tax rates. The tax is reported on an estate tax return. Unlike Canada, for all U.S. taxes, including estate taxes, citizenship is everything. Even if a U.S. citizen doesn’t reside in the U.S., estate taxes are based their worldwide assets. The current U.S. tax code allows for an exemption equal to the tax on $5,490,000 of the net taxable estate.
What If I Have Assets in Both Canada and U.S.?
If a taxpayer has assets in both the U.S. and Canada, both country’s estate tax could come into play. However, there is treaty relief from double taxation. If a Canadian taxpayer is subject to U.S. estate tax, there are treaty exemptions that allow for partial application of the $5,490,000 exclusion based on U.S. assets as a percentage of total worldwide assets. For a U.S. taxpayer subject to Canadian final income tax, the tax paid to Canada is creditable against U.S. estate tax on those assets subject to Canadian tax.
In the Buffalo area, owning property on the beach in Canada has been occurring for generations. Conversely, many Canadians purchase vacation homes in the southern U.S. for winter getaways. In addition to the cross border ownership of real property, it has become increasingly common for taxpayers to own closely held businesses in the non-resident country. Because of the interplay between the two country’s “estate” tax laws, careful cross border planning is recommended when a taxpayer desires to own real estate or other property in the U.S. or Canada when they are a citizen or resident of one country but not the other. It is generally best to own foreign investments through an entity such as a trust, LLC, or corporation rather than directly. If property is currently owned directly, there are options that can remedy exposure to estate or final income tax respectively.
Getting the Right Cross Border Tax Planning Guidance
If you currently own or are considering investment in property in the U.S. or Canada and are not a current resident or citizen of the country where your investment property is located, we can assist you in U.S.-Canada cross border tax planning considerations that can help you bypass estate tax issues for the non-citizen/non-resident country, contact us here.