“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.View full article
By: Howard B. Epstein, CPA
The Bank Records and Foreign Transactions Act- commonly referred to as the Bank Secrecy Act, became law in 1970 out of a growing complexity of the national and international economy, and technological revolution. Activities increased not just at home but abroad. This allowed the IRS to require citizens or residents of the U.S., or a person in, or doing business in the U.S. to file reports on any financial accounts with aggregate totals valuing $10,000 or more. But did you know……
As a result of new legislation on foreign tax reporting and disclosure of financial assets, some taxpayers may be required to file the new foreign financial assets disclosure statement (Form 8938) with the income tax return, and the Report of Foreign Bank and Financial Accounts (FBAR) seperately. Filings and returns are due April 15th or June 15th, if living in the U.S. For those living outside the U.S., extensions for October 15th filings can go through December 15th. These reporting requirements will potentially add to both taxpayer roadblocks and the complexity of tax law changes.
On March 18, 2010, the President signed the HIRE Act, containing the Foreign Account Tax Compliance Act, into law. Addressing taxpayer concerns, the law requires individual taxpayers with foreign financial assets with an aggregate balance exceeding stipulated dollar amounts during a taxable year to file a disclosure statement with his or her income tax return for that taxable year. The stipulated dollar amounts can be found in IRS Form 8938. Beginning with 2011 individual tax return filings; the new law requires compliance with filing the disclosure statement (Form 8938) describing the maximum value of the assets during the taxable year. The disclosure statement should also provide the following information in the case of a:
Financial account – the name and address of the foreign financial institution in which such accounts are maintained and the number of such account.
Stock or security – the name and address of the foreign issuer and such information as is necessary to identify the class or issue of which such stock or security is part of.
Contract, interest, or other instrument – such information as is necessary to identify such contract, interest, or other instrument and the name(s) and addresses of all foreign issuers and counterparties with respect to such contact, interest, or other instrument.
What should you do next?
It is important to note that while there are similarities between the FBAR and FATCA filings, there are also a number of differences when filing each of the Forms. Freed Maxick International tax practice professionals are here to assist you with your FBAR filings. We can assess FBAR filing requirements and prepare current and past due FBARs. We can navigate the IRS guidelines and minimize potential penalties through the various IRS Voluntary Disclosure Programs available. Contact us to connect with our experts.