US estate tax exposure for Canadians

An FYI to those who own assets in the United States.

While many believe that US estate tax only applies to US citizens and permanent residents, tax professionals know that this isn’t necessarily true. In fact, Canadian residents who are neither US citizens nor US residents face the possibility of being subject to US estate tax on assets they own within the US. Such assets include; US real estate, US stocks and any other tangible property located within the US. The following highlights some of the main points that Canadians should know about the US estate tax, as acknowledged by leading accounting firm Grant Thornton LLP. 

One of the main things to acknowledge when determining how you may be subject to US estate tax, is to recognize your position of residency. The concept of residency used for estate tax purposes in the US is different from the concept used for income tax. For estate tax purposes, "residence" means domicile and is based on the specifics of each case. Thus, in regards to income tax, it is very possible for a non- US citizen to be an income tax resident without becoming domiciled there. Subsequently, unlike income tax, estate tax does not apply to gains accrued on the property. Rather, it is based on the fair market value of US assets. 

To help reduce the gross tax payable on US estate taxes, Canadians can take advantage of the following relief provisions.

1. Basic and unified credits

- Non-residents are entitled to a limited estate tax credit of $13,000 USD, which exempts US assets that are worth up to $60,000 USD at the date of death.

2. Additional Treaty relief

-Treaty also provides additional relief from US estate tax. Ex: Canadian residents who are not US citizens and that have a gross worldwide estate at the time of death that does not exceed $1,200,000 USD may qualify for small estate tax relief.

-The Treaty also provides for a nonrefundable spousal credit.

In addition to the relief provisions, there are also some estate-planning tools that can be used to help ensure that your assets are treated accordingly after you pass. Such tools also have the potential to reduce US estate taxes.

3. Use of non-recourse mortgage to finance US real estate

- If you use a non-recourse mortgage to finance US property, the liability will be allocated directly against the value of the US property in the amount of the loan, reducing the amount that is subject to the US estate tax.

Life insurance

- It may be possible to take out life insurance to cover contingent estate tax.

Qualified domestic trust (QDOT)

- A QDOT is a US trust that defers payment of tax until the death of the surviving spouse.

Tenancy in common

- When property is owned jointly with a spouse, upon the death of the first spouse, US estate tax only applies to his or her share of the property.

Canadian discretionary trust

- A Canadian resident trust can also be set up to acquire, and own, the property.

To read the full article and get more information on the implications of US estate taxes, click here: Grant Thornton LLP

If you have any questions regarding any US assets you may hold, contact your Continuum II advisor today.