Death and Taxes and Taxes in Death – U.S. Estate Taxes
We’ve all heard the refrain before – death and taxes – these are two certainties we must all face as part of life. Believe it or not, you can also be taxed after death.
After your death, even if you are a Canadian citizen your estate may be subject to U.S estate taxes.
What is U.S. Estate Tax?
This is the tax imposed on the estate of a deceased person, such as property transferred under a will and certain other property that flows on death. This tax can apply to U.S. business assets, U.S. real estate property, U.S. stocks and other assets above a certain market value. I’ll provide more details on that in a bit.
U.S. estate tax is applied on a scale. These rates apply whether the individual is a U.S. citizen, a U.S. resident, or a non-resident ― the difference is that for non-residents who are not U.S. citizens only the value of property with a U.S. location or connection is included in calculations. Canadians investing in the U.S. should be concerned about this and read on to see if this tax might apply to their estate.
But I’m a Canadian citizen!?
Regardless if you’re a Canadian resident, even if you don’t live in the U.S. or you’re not married to a U.S. citizen, upon death your estate may be subject up to 40% U.S. estate tax after January 2013. (Recall Canada doesn’t have any estate tax.) As a Canadian citizen, when you die, our tax laws say you dispose of all your capital property and assets at fair market value, unless the assets are transferred to certain people. You may have some capital gains but you may also be able to take advantage of some tax deferrals. Let’s quickly use RRSPs as an example.
When Canadians die, RRSPs are deemed “disposed” and depending upon who is the beneficiary, the tax consequences from your RRSP can be deferred to your spouse or other financially dependent individual.
Back to U.S. estate taxes…
When Canadians die, they will be forced to pay U.S. estate taxes depending primarily upon:
- their worldwide assets, and
- how much of those worldwide assets are U.S. “situs” assets.
U.S. situs assets is a fancy term that includes the following stuff:
- Real estate property (e.g., condo in Florida) and other tangible property situated in the U.S.,
- U.S. securities, including those held in a discount brokerage account in Canada or outside Canada like:
- U.S. mutual funds including money market funds,
- U.S. securities including ETFs and stocks in an RRSP, RRIF, RESP or TFSA,
- Any business-related assets owned by a sole proprietor and used in a U.S. business activity,
- Some U.S. debt obligations.
Fortunately, the Canada-U.S. tax treaty provides Canadians with some exceptions from U.S. estate tax.
As of January 2013:
Generally speaking, this treaty allows Canadians to avoid U.S. estate tax if:
- The worldwide assets of the deceased estate value is less than $5.5 million USD
- U.S. situs assets of the deceased are less than $60,000 USD at the time of death regardless of worldwide assets.
You must satisfy both of these conditions to have U.S. estate tax exposure.
Updated for clarity as of January 2019:
- If the value of U.S. property you own upon your death exceeds US$60,000, your estate is required to file a U.S. estate tax return regardless of whether you’ll actually incur a U.S. estate tax liability.
- Starting January 1, 2018, the U.S. estate tax exemption is increased from US$5 million to $10 million, subject to a new “chained CPI” inflation-adjustment factor, which would make the exemption approximately US$11.4 million for 2019. These changes also increase the U.S. gift tax and GSTT exemptions.
- The increased exemptions will expire on December 31, 2025. At that time, the increased exemptions will revert back to the current $5 million exemption (indexed to inflation) beginning on January 1, 2026, unless additional legislation is enacted to extend or change them.
- The 40% maximum tax rate for U.S. estate remains the same for 2018 to 2025.
But also know…
In addition, under the Canada-U.S. tax treaty a foreign tax credit may be claimed in Canada with respect to U.S. estate taxes paid. The credit may only be claimed to offset Canadian income tax otherwise payable to those U.S. situs assets such as:
(a) capital gains tax triggered in Canada upon the death of the owner of U.S. situs assets, and
(b) RRSP/RRIF income inclusions where the RRSP/RRIF held U.S. situs assets.
The latter is very important to be aware of (and your lawyer and professional accountant will know what to do) since if this foreign tax credit is not applied for, the credit will not be applied and your estate may be forced to pay both U.S. estate tax and Canadian income tax on the U.S. situs assets. Double-taxation.
Needless to say this is a very complex tax subject and U.S. estate taxes can make investors’ heads spin. Furthermore, I just scratched the surface with this post today. So, to wrap up, some considerations for you for a complex but important subject:
- Make sure you have an up to date will with an executor named,
- Make sure you have beneficiaries identified for all your investment accounts which permit beneficiary designations,
- If you have a large worldwide estate, choose an executor who will strategically maximize your estate’s ability to claim a foreign tax credit in Canada for any U.S. estate tax required to be paid.
I want to thank Mark Goodfield and namely his colleague Katy Basi for providing some assistance on this blogpost. Katy Basi is a barrister and solicitor in the Toronto area, focusing on wills, estate planning and income tax law. While Katy is not qualified to practice U.S. law, she did review this post based on her current knowledge in this complex area.