Whether you are a US resident or not, it is important that all individuals understand US estate tax and how it can affect them upon death. Estate taxes are taxes that are imposed on the transfer of a person’s estate after their death. These taxes can be imposed by both the United States government and the Canadian government, and they can significantly impact the value of an estate.
This article discusses how US estate taxes can be imposed on individuals residing outside the US.
Upon the death of an individual who is a US citizen, green card holder, or “domiciled” individual (a US resident), the individual is subject to US estate tax. What surprises people is that an individual who is not a US citizen, green card holder, or “domiciled” in the US may also be subject to US estate taxes because the individual owns certain US assets, known as “US situs property”.
US situs property includes, but is not limited to:
- Real property located in the US
- Shares of US companies (both private and public)
- Other US securities including those held in Canadian brokerage accounts
- Deposits in US bank accounts
Shares of US public and private corporations and other US securities are considered US situs property even if these are owned in a registered account such as an RRSP or a TFSA.
If you are a Canadian resident and you own assets in the United States, it is important to understand the US estate tax rules and regulations. Here are some key points to keep in mind:
What is the US estate tax?
The US estate tax is a tax on the transfer of property at death. It is based on the fair market value of the property at the time of the owner’s death. The US estate tax applies to all US citizens and residents, as well as to non-US citizens and residents who own assets in the United States.
How does the US estate tax work?
The US estate tax is based on the value of the estate at the time of the owner’s death. The estate tax is calculated by taking the value of the estate and subtracting any allowable deductions and exemptions. The resulting amount is then taxed at a rate that can range from 18% to 40%.
What are the exemptions for the US estate tax?
The US estate tax exemptions are subject to change and should be reviewed regularly. For 2023, the US estate tax exemption is set at $12,920,000. This means that any estate valued at less than $12,920,000 is exempt from US estate taxes. For estates valued above this threshold, the estate tax will be assessed on the portion of the estate that exceeds the exemption.
What are the implications for Canadian residents?
Canadian residents who are not US citizens may be subject to US estate taxes if the value of their US situs assets exceed the US estate exemption threshold of non-US citizens and residents.
US transfer tax law permits non-US citizens, non-residents to claim a US estate exemption on the first U$60,000 worth of US situs property, which equates to unified credit of U$13,000. However, for Canadian residents, the terms of the Canada-US Income Tax Treaty permits Canadian residents to claim an enhanced prorated unified credit.
The enhanced prorated credit is calculated by multiplying the unified credit that applies to US citizens by the ratio of the deceased’s US situs assets to the value of their worldwide estate. In effect, for Canadians residents, no US estate tax will apply where the value of their US does not exceed U$60,000, or the value of their worldwide estate does not exceed $12,920,000 (for the 2023 calendar year).
Even if the prorated unified credit fully exempts the estate from having any US tax balance, the estate is still required to file a non-resident US estate tax return (US Form 706-NA) and disclose the additional credit under the Canada-US Income Tax Treaty on Form 8833. Failure to file this return could delay the settlement of the individual’s estate and could result in the cost basis of the US situs property to be $nil in the hands of the estate’s beneficiary, which could result in double taxation when the property is later disposed.
How can Canadian residents minimize their US estate tax liability?
Canadian residents who own assets in the United States can take steps to minimize their US estate tax liability. This can include setting up trusts, gifting assets, and structuring their estate plan in a way that takes advantage of US and Canadian tax laws. It is important to work with a qualified estate planning professional who has experience working with cross-border estates.
US estate taxes can be a complex issue for Canadian residents who own assets in the United States. It is important to understand the US estate tax rules and regulations and to work with a qualified estate planning professional to minimize your tax liability. With careful planning and a thorough understanding of the rules, you can ensure that your estate is protected and your loved ones are provided for.
It is important for Canadian residents who own US situs property to speak with their accountants and executors to understand the potential liability and filing requirements and to determine if there are any actions they can take now to manage their potential US estate tax exposure.
If you or someone you know owns US situs property, and you have further questions on how US estate taxes could affect your estate, contact your RLB advisor or RLB’s US Tax Team to discuss.
