If you’re a Canadian who owns U.S. real estate, business assets or shares in U.S. companies, your estate may be exposed to estate tax after your death. While Canada has no estate or inheritance tax, estate tax has had a long and colourful history in the United States, dating back to 1916. It was temporarily phased out by tax legislation introduced during the George W. Bush administration in 2001, but due to a sunset clause, U.S. estate tax was reinstated in 2011.
Currently, Canadian owners of U.S. assets will only be subject to U.S. estate tax if the value of their worldwide estate (including Canadian, U.S. and other assets) exceeds US$5.34 million in 2014. If your worldwide estate is worth less than $5.34 million, you will get a full exemption from U.S. estate tax. The American Taxpayer Relief Act of 2012 established a $5 million exemption and indexed the amount to the annual inflation rate. The act also raised the top estate tax rate to 40% from 35%, with the lowest rate pegged at 18%.
The size of your worldwide estate will be measured according to American rules, which can produce larger estate values than many Canadians would expect. For example, a life insurance policy death benefit from a policy you own on your own life will be included as an asset in your estate, even if the money isn’t paid to your estate.
“The biggest exposure we typically find is a U.S. vacation home — second would be a U.S. stock portfolio,” says Beth Webel, chartered accountant and tax services partner with Pricewaterhouse Coopers LLP in Oakville, Ont.
Some U.S. assets can be overlooked
If you’re unsure if U.S. estate tax could apply to you, collect information on your American assets. One commonly overlooked item is shares in U.S. companies, which may be subject to estate tax even if they’re held inside Canadian brokerage accounts — including registered retirement savings plans, registered retirement income funds and tax-free savings accounts. If you spent part of your career working in the U.S., American stock options and pensions may also be subject to U.S. estate tax.
“It’s worth consulting the experts if you think your estate could be exposed to U.S. estate tax, because planning in advance may help you to reduce your exposure,” says Cindy Crean, Managing Director, Private Client at Sun Life Global Investments. “U.S. estate tax is complex and can impact you even if you’re not a U.S. citizen or resident.”
Strategies to reduce U.S. estate tax exposure
There are a few strategies to consider if you want to reduce your U.S. estate tax liability.
- Unified credit. The estates of Canadians who are not also U.S. citizens can claim a tax credit under our country’s tax treaty with the United States. The treaty allows your executor to reduce your estate’s tax liability by claiming a unified credit equal to the greater of $13,000 or the tax payable on $5.34 million ($2,081,800) multiplied by the percentage of your estate in U.S. assets. For example, if your total estate was worth $10 million, including a $1 million U.S. stock portfolio (so 10% in U.S. assets), the estate tax payable could be $345,800. But your executor could claim a credit of $208,180 ($2,081,800 x 10%) and reduce the tax payable to $137,620.
- Marital credit. The tax treaty allows a marital credit if your U.S. assets pass to your spouse upon your death. The marital credit equals the lesser of the unified credit as calculated above, and the amount of the estate tax due. The marital credit can be claimed in addition to the unified credit. In the example above, the combined credits would wipe out the estate tax payable altogether.
Setting up structures such as trusts to hold U.S. property is another way to potentially reduce or eliminate U.S. tax exposure.
“The good news is with the enhanced $5.34 million exemption, the bulk of Canadians with modest U.S. properties will find they won’t have U.S. estate tax due after the treaty credit,” says Webel.
Even if no U.S. estate tax is due, you may still be required to file a U.S. estate tax return and a statement claiming the benefits provided under the tax treaty. Your executor will need to file a U.S. estate tax return within nine months after the date of your death.