The U.S. taxes transfers during an individual’s lifetime (gift tax) and at death (estate tax). These taxes apply to the net value of the asset transferred, not the net gain. Canada only taxes the net gain on assets transferred both before or after death.
This article considers the top five U.S. federal estate and gift tax issues for residents of Canada on transfers of assets that may be subject to the U.S. estate and gift tax. Our commentary is a high-level discussion of issues and does not constitute tax advice. Please contact Andersen LLP for further guidance.
Topics:
- U.S. Gift Tax
- U.S. Estate Tax
- Domicile
- Canada-U.S. Tax Treaty
- Canadian Resident with U.S. Spouse
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U.S. Gift Tax
The U.S. imposes gift tax on gratuitous transfers of assets.
Why Does It Matter?
U.S. gift tax is payable by the donor at tax rates up to 40% of the fair market value of the assets transferred. It applies to all transfers by a U.S. citizens or domiciles. Non-U.S. citizens not domiciled in the U.S. are subject to U.S. gift tax only on transfers of real property and tangible personal property located in the U.S. The Canada-U.S. tax treaty does not protect Canadians from U.S. gift tax.
Scenario 1: Canadian Parent Gives Cash to Child in the U.S.
A Canadian resident parent gives $20,000 (all amounts are in US$) to a child while visiting him in the U.S. to help buy U.S. real property. Cash is tangible personal property. A gift of cash completed in the U.S. is a taxable gift. A gift which is to be used to acquire U.S. real property is also a taxable gift.
Scenario 2 – Child Assisting Parents with U.S. Medical Expenses
A Canadian resident child helping their parents in the U.S. with medical care expenses could be a taxable gift.
Scenario 3 – Canadians Transferring U.S. Real Property
Gratuitous transfers of U.S. real property are taxable gifts except where the recipient is the donor’s U.S. citizen spouse.
What Is the Solution?
Solutions will depend on the facts and circumstances, but may include:
- Gifts completed outside the U.S. by non-US citizens not domiciled in the U.S. are not subject to U.S. gift tax.
- Donors should avoid making gifts for the specific purpose of acquiring U.S. real property or other tangible property in the U.S. Such gifts should not be restricted to these purposes and should not be made coincident with a purchase of them.
- U.S. gift tax does not apply to medical expenses paid on behalf of an individual if the payment is made directly to the medical care provider.
- Canadians transferring title to U.S. real property should sell it to the intended recipient instead of gifting it. A sale is a taxable transfer for both U.S. and Canadian income tax purposes, which allows U.S. tax to offset Canadian tax. A gift is subject to U.S. gift tax which cannot be used to offset Canadian income tax that would apply to the transfer.
U.S. Estate Tax
The Issue?
U.S. imposes estate tax of up to 40% on the decedent’s estate.
Why Does It Matter?
U.S. citizens and domiciles are subject to U.S. estate and gift tax on their worldwide estate. Canadians who are neither U.S. citizens nor domiciles are only subject to U.S. estate tax on U.S. situs-assets. Those include securities issued by U.S. persons, U.S. real property and personal property located in the U.S.
Scenario 1: You Move to the U.S.
Assume for illustration purposes that your worldwide estate’s fair market value is approximately $15 million. The current threshold for exemption from U.S. estate tax is $11.7 million (2021). This exemption drops to approximately $6 million in 2026 and current proposals before U.S. Congress plan to lower it to $5 million in 2022. Under the current $11.7 million exemption you would be subject to U.S. estate tax of approximately $1.3 million on your death.
Scenario 2: You Own U.S. Real Property
If you and your spouse are neither U.S. citizens nor U.S. domiciles and your worldwide estate exceeds the $11.7 million exemption, your estate will be subject to U.S. estate tax on your U.S. real property unless its value is less than $60,000.
Scenario 3: You Own U.S. Securities through your RRSP and TFSA
If you are neither a U.S. citizen nor a U.S. domicile you will be subject to U.S. estate tax on U.S. securities held by you, including through your Registered Retirement Savings Plan and Tax-Free Savings Accounts.
What is the Solution?
- Estate planning prior to moving to the U.S. is critical for individuals whose net worth is approaching $5 million or is likely to rise to that amount or higher in the future. Generally, pre-move transfers to a spouse can be accomplished on a tax-free basis to equalize your respective estates.
- If you are not a U.S. citizen or domicile and hold U.S.-situs assets with a fair market value of over $60,000, your estate will have a U.S. tax filing obligation on your death. Without the Canada-U.S. tax treaty, U.S. estate tax would apply too.
- If you reside in Canada, are not a U.S. citizen or domicile, and your worldwide estate exceeds the current $11.7 million (2021) exemption or may in the future, steps should be taken to protect them from U.S. estate tax.
- The ownership of U.S. vacation property by Canadian residents who are neither U.S. citizens nor domiciles and their worldwide estate exceeds the current lifetime exemption of $11.7 million exposes them to U.S. estate tax. Multiple solutions are available to protect Canadians from U.S. estate tax but some of these may not provide complete protection or have other tax implications.
- U.S. securities owned by Canadians who are not U.S. citizens or domiciles are subject to U.S. estate tax. The simplest answer here may be to hold these investments here through mutual funds or exchange-traded funds (ETFs) formed in Canada or elsewhere outside the U.S. or a Canadian entity.
U.S. Domicile
The Issue?
U.S. citizens are subject to U.S. estate and gift tax on their worldwide assets. Individuals who are not U.S. citizens or domiciles are only subject to U.S. estate tax on U.S.-situs assets. In the case of U.S. gift tax, non-U.S. citizens and domiciles are only subject to U.S. gift tax on transfers of tangible property located in the U.S.
Why Does it Matter?
Unlike the objective determination of residency for aliens for U.S. income tax purposes, domicile is a subjective analysis that consider an individual’s facts and circumstances. Understanding domicile allows you to reduce exposure to U.S. estate and gift tax.
Scenario 1 – Canadian Moving to the U.S. for Work
Generally, an individual is considered domiciled where they live without an intention to leave. Demonstrating an intention to leave requires acting on it. Once an individual has acquired domiciliary in the U.S., it is presumed to continue until it can be shown to have changed. U.S. domiciles are subject to both U.S. gift and estate tax on transfer of their worldwide assets.
Scenario 2 – Becoming a U.S. Citizen
A Canadian working in the U.S. married to a U.S. citizen and applying for U.S. citizenship strongly implies domicile in the U.S. U.S. citizens are subjects to U.S. estate and gift tax as well as U.S. federal income tax regardless of where they live. Renunciation of U.S. citizenship may have adverse U.S. tax consequences.
Scenario 3 – U.S. Green-Card Holder Living in Canada
A U.S. green-card holder is a U.S. resident under U.S income tax law, but not necessarily a U.S. domicile. Unless a green-card has been voluntarily abandoned at a U.S. port of entry or consulate or judicially rescinded it requires that its holder comply with U.S. federal income tax obligations even where the card has “expired”.
Solutions
- Canadians who are not U.S. citizens working temporarily in the U.S. may avoid becoming a U.S. domicile by showing intent to return to Canada and minimizing their U.S. connections. Applying for a green-card, having a U.S. home, business and/or property interests and affiliations may also be determinative.
- U.S. citizenship has many positive aspects to it, but it also has notable tax obligations. U.S. citizens remain subject to U.S. income, estate and gift tax regardless where they live. U.S. green-card holders have similar obligations particularly where they have held that status for more than seven years.
- U.S. green-card holders who do not intend to live in the U.S. permanently should evaluate the tax costs of ceasing their lawful permanent resident status in the U.S. After reaching eight years they will be classified as “long-term residents” for U.S. income tax purposes and potentially subject to U.S tax implications on abandonment of their green-card.
Tax Treaty
The Issue?
U.S. estate and gift tax law disallows or reduces credit or exemptions to individuals who are not U.S. citizens or domiciles.
Why Does It Matter?
U.S. tax law currently provides an exemption of $11.7 million from U.S. estate and gift tax to U.S. citizens and domiciles, but only $60,000 to individuals who are not U.S. citizens or domiciles. The Canada-U.S. tax treaty provides Canadians who are not U.S. citizens or domiciles a credit equal to their proportion of U.S. situs assets over their total assets worldwide. It also provides an additional marital deduction for transfers on death to a surviving spouse. Canada also allows Canadian residents a tax credit for U.S. federal and state estate taxes imposed on U.S.-situs assets to reduce their Canadian income tax on death from the deemed disposition of their U.S.-situs assets.
Scenario 1: Canadian Resident Died Holding U.S. Vacation Property
Canadian resident died in 2021. His worldwide assets totalled $5 million, including a $1 million U.S. vacation property. Under U.S. tax law, his estate would be liable for approximately $400,000 of U.S. estate tax.
Scenario 2: Canadian Resident Died Holding U.S. Securities
Canadian resident died in 2021. His worldwide assets totalled $15.6 million, including $3.9 million in U.S. securities. The decedent’s U.S. estate tax liability at death under U.S. tax law would be approximately $1.5 million.
What is the Solution?
- Under the Canada-U.S. tax treaty, Canadian residents who are not U.S. citizens or domiciles will generally not have a U.S. estate tax liability on their U.S. situs property at death if their worldwide assets are less than the $11.7 million (2021) lifetime estate and gift exemption. This amount may be lower in the future.
- Canadian residents who are neither U.S. citizens nor domiciles whose worldwide estate exceeded the $11.7 million (2021) U.S. estate and gift exemption amount have a U.S. estate tax liability where the value of their U.S. situs assets at death exceeds $60,000.
- Where Canadian residents who are not U.S. citizens or domiciles hold U.S. real or personal property or U.S. securities through a non-US corporation, they will not be subject to U.S. estate tax on death.
- Transfers at death to a Canadian resident surviving spouse who is not a U.S. citizen are eligible for an additional credit under the Canada-U.S. tax treaty.
Canadian with a U.S. Citizen Spouse
The Issue?
U.S. citizens are subject to U.S. gift and estate taxes on their worldwide assets regardless of where they live.
Why Does It Matter?
A U.S. citizen with a non-U.S. citizen spouse has additional estate planning issues.
Scenario 1: Canadian Resident with U.S. Citizen Spouse
If your worldwide estate is $15.7 million and you transfer it to your U.S. citizen spouse on your death, she will have a U.S. estate tax of approximately $1.6 million on her death or $3.9 million after 2025. If the U.S. Congress reduces the lifetime exemption amount for U.S. estate and gift tax, the U.S. estate tax on her death would be even higher.
Scenario 2: Canadian and U.S. Couple Gifting to Children
You and your U.S. citizen spouse would like to gift funds to your children. Your spouse is required to file a U.S. gift tax return where the annual gift to each child exceeds $15,000.
Scenario 3: Canadian Resident Couple and One is a U.S. Citizen
Where the U.S. citizen spouse dies first and the survivor is not a U.S. citizen, the decedent’s estate will be subject to U.S. estate tax and cannot avoid it by rolling over the assets to the surviving spouse despite that the transfer would not be subject to Canadian tax.
What Is the Solution?
- If your spouse is a U.S. citizen and your combined estates exceed the current $11.7 million (2021) exemption or a lower exemption amount in the future, caution should be exercised in putting additional assets into a U.S. citizen spouse’s estate. On the surviving spouse’s death all of it will be subject to U.S. estate tax. Using a trust where the surviving spouse is an income but not a capital beneficiary will avoid subjecting the assets to U.S. estate tax.
- When a couple are gifting intangible assets or tangible ones outside the U.S. that exceed the annual exemption amount of US$15,000, the gift should be made by the spouse who is neither a U.S. citizen nor domicile. The gift should be completed outside of the U.S. to avoid U.S. gift tax.
- A spouse who is a U.S. citizen or domicile can make annual non-taxable transfers of up to $156,000 (2021) to the non-U.S. citizen spouse.
- Gains on the sale of a principal residence in Canada are generally not taxable in Canada, but may be in the U.S. Consideration should be given to its ownership.
- U.S. citizens resident in Canada could simplify their tax affairs by renouncing their U.S. citizenship.
Further information
You may also find it helpful to watch our recent webinar on this topic. Click watch the webinar.
If you want more information on any of the above issues or others, please contact any the following:
Warren Dueck, Partner T: 604-242-1401 or 587-390-1610
E: warren.dueck.@ca.Andersen.com
Steven Flynn, Partner T: 604-242-1416
E: steven.flynn@ca.Andersen.com
Krista Rabidoux, Principal T: 587-390-6568
E: krista.rabidoux@ca.Andersen.com
Emily Yu, Principal T: 604-242-1405
E: emily.yu@ca.Andersen.com
Catherine Shen-Weafer, Senior Manager T: 604-242-1407
E: catherine.shen-weafer@AndersenTax.ca
