Few countries enjoy the close, friendly relationship enjoyed by Canada and the United States. We seem so alike that Canadians often move to the United States to work, play, and invest, but often without giving a second thought to the income, gift, and estate tax implications of their moves. What should Canadian citizens residing in the United States know about cross-border estate planning?
The assets of Canadian citizens residing in the United States could be subject to double taxation
Canada taxes the gain on citizens’ capital assets at the time of the gift or death, while the United States taxes the fair market value of citizens’ and residents’ assets at the time of the gift or upon death. For Canadian citizens residing in the United States, these laws could result in double taxation when Canadian capital gains taxes and American estate taxes are due on the same assets at the time of gifting or at death, if not for a treaty between Canada and the United States.
The Canada-U.S. Income Tax Treaty may offer relief for double taxation
The Canada-U.S. Income Tax Treaty is the first tax treaty covering U.S. estate tax between the United States and a country that does not impose an estate or inheritance tax. The Treaty tax credits include:
- Unified credit available up to $5,450,000 to U.S. citizens and residents, but available to Canadian citizens in proportion to U.S. assets only. For example, if 50 percent of a Canadian’s assets were located in the United States, only 50 percent of the credit would be available ($2,725,000).
- Marital estate tax credit for marital transfers to Canadian citizens equal to the lesser of the prorated unified credit ($13,000 under U.S. law or $5,450,000 under the Treaty) and the assessed estate tax that would otherwise be imposed on the marital transfer. The decedent must be either a U.S. citizen or a resident of the United States or Canada, the surviving spouse must be a resident of either country, and if both spouses were U.S. residents, one or both must be Canadian citizens.
- Foreign tax credit to be claimed by the executor of the estate and used for U.S. federal and state estate tax up to the amount imposed under Canadian law.
- Relief for estates worth less than $1.2 million excluding U.S. real property held directly or indirectly by Canadians.
- Registered retirement savings plans and registered retirement income fund accounts that are treated by the United States as taxable brokerage accounts and by Canada as qualified retirement plans. Canadians may elect deferral of undistributed funds to avoid income tax on these accounts while residing in the United States. Canadians who take income out of these accounts while residing in the United States will be taxed on that income.
Marital deductions and joint ownership with rights of survivorship depend on which spouse is a U.S. citizen
Any U.S. assets held jointly with rights of survivorship are included in the estate at full value when the deceased joint owner is not a U.S. citizen (if the joint owners are U.S. citizens, only the portion of the deceased joint owner is includable in the taxable estate of the deceased joint owner). Additionally, unlimited marital deductions are allowed for U.S. citizen spouses, regardless of residence, but there is no marital deduction from the gross estate if the surviving spouse is a non-U.S. citizen, unless the property is held in a qualified domestic trust.
Canadian citizens residing in the United States must pay U.S. gift taxes
Because the Treaty does not apply to lifetime gifts, gift taxes for Canadian citizens living in the United States or owning property in the United States are based on U.S. and state law. There are three exemptions: (1) an unlimited marital deduction for gifts to a U.S. citizen spouse; (2) an annual exclusion of up to $147,000 to non-U.S. citizen spouses (but no marital deduction); and (3) an annual exclusion of up to $14,000 for any other donees.
Canadian citizens residing in Oregon must pay state estate tax
Oregon imposes an estate tax on resident decedents and nonresident decedents with interest in real property located in Oregon or with tangible personal property located in Oregon. For Oregon residents, the tax is based on the gross estate multiplied by a ratio of Oregon assets (not including intangible personal property taxed by another state or country) to gross assets. For non-Oregon residents, the tax is based on the gross estate multiplied by a ratio of Oregon assets (not including any intangible personal property) to gross assets.
Canadian citizens and U.S. citizens married to Canadians residing in the United States should carefully plan their estates to minimize double taxation.