Conversation Starter – Estate planning for snowbirds

Here are some frequently asked questions to give you an overview of issues you should look out for. Use it as a general guide to see if U.S. estate tax should be on your financial radar. Then, seek specialized tax advice to find out what to do.

Q: Do I have to pay U.S. estate tax if I’m a Canadian citizen?
A: Maybe. Canadian residents may be required to pay U.S. estate tax if their estates are large, and if they pass away owning certain U.S. assets: shares of U.S. corporations, U.S. real estate, as well as other U.S. business assets.

Q: How large does the estate have to be?
A: The American Taxpayer Relief Act of 2012 set an initial estate tax exemption of $5-million U.S., indexed to inflation. So if your worldwide estate is below $5.34 million in 2014 or $5.43 million in 2015 (the indexed value; it typically goes up marginally every year), you should be okay.

Q: So if my estate isn’t worth $5.34 million, I don’t have to worry?
A: Not exactly. Even if no tax is due on the estate, your executor may still have to file a U.S. tax return, as well as a statement claiming benefits provided under the Canada-U.S. tax treaty. In many cases the transfer agents won’t agree to shift U.S. property to an estate’s heirs until the executor proves there’s no tax owing to Uncle Sam.

Q: How do I calculate my U.S. estate tax?
A: If your worldwide estate exceeds the current exemption limit (currently US$5.43 million), you’ll be required to pay estate tax on the value of your U.S. assets.

The key word here is worldwide. The exemption is based on assets you own in Canada, the U.S., and elsewhere, even though you’ll only have to pay on your U.S. assets.

Currently, U.S. estate tax rates are as follows (all figures in U.S. dollars). These figures will change over time, so check with a tax professional for current rates.

From	To	Range	Rate
0	10,000	0	18%
10,000	20,000	1,800	20%
20,000	40,000	3,800	22%
40,000	60,000	8,200	24%
60,000	80,000	13,000	26%
80,000	100,000	18,200	28%
100,000	150,000	23,800	30%
150,000	250,000	38,800	32%
250,000	500,000	70,800	34%
500,000	750,000	155,800	37%
750,000	1,000,000	248,300	39%
1,000,000	and over	345,800	40%

Q: Wow. That’s a lot of money. Is there anything I can do about this?
A: Fortunately, yes. Canada has a detailed tax treaty with the U.S., and it allows you to claim a tax credit (the “unified credit”) to minimize tax on your U.S. estate assets. That credit is calculated as the greater of:

(a) $13,000;
(b) $2,081,800 x (value of your U.S. assets) / (value of your worldwide assets).

Let’s say you have a worldwide estate worth $10-million U.S. dollars, of which $1-million is a U.S. stock portfolio. Without the credit, you’d be facing a U.S. estate tax bill of $345,800 (see table above). However, your unified credit would be:

$2,081,800 x $1,000,000 / $10,000,000 = $208,180

By applying the unified credit, you can reduce your tax owing to:

$345,800 – $208,180 = $137,620

Q: What about my spouse? Can’t I pass on assets to her without paying tax?
A: Yes, you can. The tax treaty provides a marital credit for those passing U.S. assets onto their spouses. The credit is calculated as the lesser of the unified credit and the amount of estate tax.

So in the earlier example, if you left your stock portfolio to your wife, you’d receive a marital credit for the estate tax of $137,620, for a net tax bill of nil. Keep in mind this tax credit is really just a deferral — when your spouse dies, he or she won’t be able to claim any marital credit, and will therefore have to pay tax.

Q: Doesn’t all this mean I pay tax on those assets in both Canada and the U.S.?
A: Not necessarily. Canada Revenue Agency allows a foreign tax credit for U.S. estate tax paid on U.S. assets. But because estate tax is usually higher than what capital gains tax would be here, the net result is you’ll probably end up paying the higher tax (typically that would be the U.S. estate tax).

And, since the provinces generally don’t allow a foreign tax credit, then yes, you may very well end up paying tax twice on some assets.