WEALTH Matters — Spring 2012

The U.S. Tax Trap — Seminar Summary

We hosted a seminar on April 11th to explore the impact of US income tax and estate tax on Canadian residents. We had over 70 guests attend the two sessions, but many more were unable to attend that day. In case you missed the event, here is a summary of the key points presented in the seminar:

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U.S. Estate Tax

Canada has no Estate Tax, but the U.S. does. In Canada we pay tax on income earned in the year of death, plus any unrealized capital gains that have not yet been taxed by the time of our death.

In the U.S., an Estate Tax is levied on part of the full value of the assets we own at death, after deducting an exemption amount. The assets include the fair value of all property the taxpayer owns worldwide. The exemption amount was $1.35 million U.S. dollars until a gradual but temporary increase to $5million USD was enacted in 2001. The temporary period expires December 2012 and it is widely expected that it will not be extended, reducing the exemption amount back to $1.35 million USD for 2013 and beyond. This level is so low that it will result in a U.S. Estate Tax liability for many U.S. citizens living in Canada.

Many Canadian citizens will also be required to pay this tax if they own property in the U.S. at the time of their death. Real estate regulations in the U.S. require an Estate Tax clearance certificate to be able to change the title on real property situated in the U.S. when the owner has died. It is a costly process to prepare and file U.S. returns and obtain the necessary clearance certificates, with the cost averaging about $10-20,000 for legal fees and fees for U.S. agencies to handle the required administrative functions and issue the required documents. These costs are in addition to any Estate Tax due.

Thinking of buying property in the U.S. ?

Canadian citizens looking to buy real estate in the U.S. can avoid the requirement to file for and pay U.S. estate taxes, and the administrative costs of title change on their property, by holding U.S. real estate in an Ontario-based trust.

A Trust is considered a separate person under the law, but since it cannot die, it won’t be subject to U.S. Estate Tax. Provided the Trust is established in Ontario, with trustees resident in Ontario, there would be no change in property ownership at the time of the death of the donors to the Trust. The Trust beneficiaries would be entitled to benefit from the value of the property in the Trust.

This structure is only workable if you are prepared to live out your retirement years without access to the capital you donate to the Trust. If your financial plan depends on your later selling the U.S. property for cash to help fund your retirement expenses, this structure is likely not appropriate for you.

By lending the purchase funds to your own trust, you can later recover them from the trust and only encumber the future gains in the value of the property. This modification may make the Trust structure better fit your long term goals.

Please call us if you would like to discuss your own options. We’re here to help!

U.S. Income Tax

If you live in Canada, you must file a Canadian income tax return. US income tax returns must be filed by all US citizens, even if they live and work in Canada. US income tax returns must also be filed by those earning income in the US from rental property or employment there. There is a tax treaty in place between Canada and the US which allows Canadian residents to claim tax paid on their Canadian return to offset taxes due on their US return. Since Canadian income tax rates are generally higher than those in the US, most tax filers will owe no additional tax because of filing the US return in addition to their Canadian return.

 Those who fail to file their US returns on time risk losing their treaty protection, and the credit for tax paid in Canada. A 2-month extension has been granted to June 15th to allow those behind on their US tax filing to get caught up and avoid losing their treaty protection and credits for filings missed in past years.

Some types of income are not declared in Canada, which must be declared on the US return, such as the gain on the sale of your principal residence, or income in your RRSP from US stocks or mutual funds that invest primarily in the US. Careful tax planning can help avoid US income tax on these items.

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