US Gift Tax Exposure on Joint Ownership of Property
The most common way spouses hold property in Canada is joint tenancy with right of survivorship. Joint ownership provides each joint tenant an undivided interest in the property and when one spouse dies, the property immediately passes to the surviving spouse without probate. In the case where one spouse is a U.S. citizen and the other is not, care should be exercised when creating or terminating joint tenancy as certain transactions may trigger U.S. federal gift tax for the unsuspecting U.S. citizen donor.
Where a joint bank or brokerage account is created with funds contributed by the U.S. citizen spouse, a gratuitous transfer subject to U.S. federal gift tax may occur in certain instances. If the account is created and either co-owner can unilaterally withdraw the funds a gift has not occurred because the transfer is revocable and the gift is incomplete. However, a gift will have occurred for U.S. federal gift tax purposes at the termination of the account or at the time of a withdrawal from the account to the extent the non-U.S. citizen spouse receives funds in excess of the amount he or she contributed, uses those funds for his or her benefit and has no legal obligation to repay those funds to the contributor U.S. citizen spouse. Another instance where a gift may occur is where upon creation of the account the non-U.S. citizen spouse has an immediate one-half interest in the account such that the U.S. citizen donor cannot unilaterally withdraw the funds without the non-U.S. citizen spouse’s consent.
The U.S. federal gift tax consequences upon creation of joint tenancies with respect to real property are generally more favorable than those for tangible personal property. For joint tenancies created in real property after July 13,1988 between a U.S. citizen and a non-U.S. citizen spouse, no gift for U.S. federal gift tax purposes occurs upon creation of the joint tenancy even if the U.S. citizen spouse contributes 100% of the funds to purchase the property. However, a gift subject to U.S. federal gift tax may occur where upon termination of the joint tenancy, other than by reason of the death of a spouse, the non-U.S. citizen spouse receives proceeds from the sale in excess of the proportion of the consideration he or she provided at purchase.
The rules of joint-tenancy and application of U.S. federal gift tax must be viewed in light of the annual gift tax exclusion for gifts from a U.S. citizen to his or her non-U.S. citizen spouse. In 2013, a U.S. citizen can gift up to US$143,000 in a calendar year (indexed annually) to a non-U.S. citizen spouse without triggering U.S. federal gift tax. Nonetheless, careful planning should be exercised as U.S. federal income tax may be triggered on gifts of appreciated property by U.S. citizens to a non-U.S. citizen who is their spouse or former spouse.