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.

     

  

Segregated Funds vs. Mutual Funds

While segregated funds and mutual funds have many of the same benefits there are some major differences that will determine which type of investment is right for you. To give you a better idea of what each type of investment offers, the following chart outlines the similarities and differences between segregated funds and mutual funds.

It is also important to note that segregated funds are individual variable insurance contracts that are regulated under the Life Insurance Act and the following only applies to registered contracts.

	Segregated Funds	Mutual Funds
Overview	Your net premiums are invested in the segregated funds of an insurer which, in turn, invests in securities such as stocks, bonds and money market investments. Segregated Funds are insurance products.	Money is pooled and invested on behalf of unit holders in securities such as stocks, bonds and money market investments.
Regulated by	Provincial Life Insurance Acts	Securities Legislation
Capital Growth Potential	Yes	Yes
Track unit value in the newspaper	Yes	Yes
Diversify investments	Yes	Yes
Financial Protection	At death and maturity, premiums minus withdrawals are usually guaranteed, between 75% and 100%.	No guarantees on investment performance. Theoretically, you could lose everything.
Death Benefit	Beneficiaries receive either the guaranteed death benefit or the market value depending on which is greater.	The estate or beneficiaries will get the market value only – there are no guaranteed minimums.
Probate Protection	At death, proceeds can be paid directly to a named beneficiary, avoiding the estate administration process, and the cost of probate fees.	At death, proceeds are an asset of the estate and are subject to the estate, administration process and legal fees. It could be some time before the estate can distribute the mutual funds.
Creditor Protection	Designations in favour of a parent, spouse, child or grandchild may result in the insurance money being exempt from seizure. This is sometimes referred to as "creditor protection".   The money cannot have been deposited as: Part of a fraudulent conveyance (transferring money to keep it out of reach of existing creditors). Within a specific time period before bankruptcy	No protection against the claims of creditors.
RRSP Eligible	Yes	Yes
RESP Eligible	Yes – only one company though	Yes
Taxation Implications for non-registered investments	You are only taxed on the income you actually receive. Taxation is based on how long you own the Segregated Fund units within the income period. E.g. if you buy units one day before the fixed date, you are only assessed for one day's income. The unit seller is assessed for income made before the end date.   You can use capital losses to offset capital gains from other sources.   For accounting purposes, acquisition fees are excluded from the adjusted cost base and treated separately .	You could be taxed on income you never received. Taxation is based on who owns the mutual fund units on a given date at the end of the income period. E.g. if you buy units one day before the end date, you are assessed for all income earned in that period, even though you did not benefit from that income. Capital losses must be carried forward by the fund and are not allocated to you, the unit holders.   Acquisition fees are included in the adjusted cost base.
Under what circumstances might these be more suitable?	Non-registered or registered funds.   Investors approaching retirement.   Investors who like the security of guarantees.   Business owners who want creditor protection.	Non-registered and registered funds.   Investors who want a wide variety of specialized fund choices in their investments.   Investors willing to give up guarantees for potential increased returns.

If you have any further questions regarding which type of investment is right for you, call our offices today at (905) 332-6633 and speak with a Continuum II advisor.

Manulife's Quick Issue Term Insurance

Buying a house? Renewing your mortgage? Or in need of a quick and easy term insurance to cover yourself and your family?

If you are between the ages of 18 and 50, Manulife’s Quick Issue Term could be your answer to fast and easy mortgage, or life, insurance to cover your family. Optional coverage includes a children’s protection rider and the application does not require blood and urine testing, with fewer medical questions.

Answer the following questions and you can get quick and easy coverage anywhere from $100,000 to $500,000.

1.  In the past 60 days, have you consulted a doctor or other health practitioner or had medical testing done for anything other than pregnancy or minor ailments? (For example, sprains, cold or flu?)

2. In the next 90 days, do you have medical tests scheduled or recommended for anything other than pregnancy, routine immunizations, flu shots or minor ailments (for example, cold or flu?)

3. In the past two years, has a doctor or other health practitioner recommended counselling or recommended a treatment or medication that lasted longer than one month?

4. In the past 12 months, have you visited a dentist for routine dental care?

Simply call our office at (905) 332-6633 and complete the online application with either Dania or Lori. Please have the following information ready and the application process can simply be done over the phone.

• Banking information, including transit, bank code and bank account information
• Driver’s license information
• E-mail address

You will need to provide your electronic signature and your first payment will come directly out of your bank by EFT. All subsequent payments can then be paid monthly from your account, or you can choose to pay them annually and Manulife will send you an invoice for the balance of the funds required.

The good news is Manulife responds to your application, in most cases, within one business day. If you are approved for coverage, your contract and beneficiary form will be mailed to you directly by Manulife in as little as one business day– saving you time. You will be responsible for returning the beneficiary form to Manulife following the instructions provided.

For more on Manulife's Quick Issue Term Insurance check out the video below.

If you have any questions regarding Manulife's Quick Issue Term Insurance, or about your existing coverage, please don't hesitate to call the office.