The Unites States imposes a significant burden on the death of Canadians and
other non-US citizens who own US stocks and real estate. Below we answer
many general questions regarding the US federal estate tax and its effects
on Canadians. Note also that several states have their own estate tax
and therefore should also be reviewed as part of your tax planning.
The questions below apply only where both the deceased and
the surviving spouse are Canadian citizens and residents.
If either spouse is a US citizen or resident, the answers
to the following questions may differ.
What Property is Subject to US Estate Tax?
US estate tax applies to property of Canadians that is
situated within the US, including:
- Real
property located in the US
- Certain
tangible personal property located in the US
- Shares
of US corporations regardless of where the share certificates
are located or traded
- Debts
of US persons, including the US government, with specific
exceptions.
- US
pension plans and annuity amounts, including Individual
Retirement Accounts (IRAs).
What Tangible Personal Property Could Be Taxed?
Personal assets located in the US at the time of death could
be subject to US estate tax. US case law has determined that
the assets must be located in the US with a degree of permanence.
Therefore, the estate tax should not apply to jewellery or
other items that you take on vacation. However, furniture
in your US condominium may be subject to US estate tax.
What Assets are Excluded from the Definition of Property
Situated in the US?
Assets normally excluded include:
- Shares
of a foreign (non-US) corporation regardless of where
the assets are situated
- US
bank deposits
- Certain
US corporate bonds that are publicly traded outside the
US
- Certain
Debt obligations.
Are Any Deductions Allowed from the Taxable Estate?
The taxable
estate for estate tax purposes is the gross value of all
of the deceased’s property situated in
the US minus certain allowable deductions. The most significant
deductions are the following:
- Amounts
left to the deceased’s
spouse if the spouse if a US citizen
- Amounts
transferred to a qualified domestic trust
- A
deduction for a non-recourse mortgage encumbering US
real property
- A
deduction for a share of the deceased’s liabilities
at death, including Canadian income taxes payable.
What Tax Rates Apply?
US federal estate tax applies on the cumulative value of
all taxable gifts made during your lifetime and at death,
at graduated rates ranging form 18% to 46% on cumulative
lifetime transfers over US $2 million for 2006. These rates
are scheduled to decrease gradually to target rates of 45%
for estate tax and 35% for gift tax in 2009. Under current
law, the estate tax is repealed in 2010 and reverts to its
2001 form in 2011. It is expected that these provisions will
probably change before 2010.
What is the Lifetime Estate Tax Credit?
Non-residents
of the US who are not US citizens are allowed a credit
of US$ 13,000 against the estate tax, effectively
exempting $60,000 of the estate from taxation. Additionally,
under the Canada-US tax treaty the credit is increased for
residents and citizens of Canada to US$780,800 in 2006 and
higher in later years. The credit must be prorated by the
value of the Canadian deceased’s US estate over the
value of the deceased’s worldwide estate as determined
under US rules. The exemption amount is scheduled to increase
gradually to $3.5 million in 2009 and repealed in 2010. In
2011, the exemption amount of $1 million and the estate tax
will return. The gift tax is not scheduled for repeal.
When Must a US Estate Tax Return Be Filed?
A US estate tax return must be filed if your property within
the US is worth over $60,000 even if no tax is payable. You
must disclose all your worldwide assets to the IRS on this
return to benefit from the Canada- US tax treaty.
Can I Leave Assets to My Spouse to Avoid US Estate Tax?
Under
the Canada-US tax treaty if an estate tax marital deduction
would have been available had the surviving spouse
been a US citizen, then a marital credit is available. This
credit will be capped at the lesser of the applicable credit
amount allowed to the deceased’s estate and the US
estate tax payable after other credits. This effectively
allows a minimum $26,000 credit where US property is transferred
to a spouse on death.
Will Canada Allow a Credit for US Estate Tax?
Under
the Canada-US tax treaty, Canada permits US estate tax
on US assets to be deducted from a Canadian resident’s
Canadian tax payable for the year of death. The credit will
be limited to the Canadian federal tax attributable to the
deceased’s US source income for the year of death.
For this purpose, the definition of US source income is expanded
to include gains on deemed disposition of US securities.
Disclaimer
|
"The
information contained herein is of a general nature and
is not intended to address the circumstances of any particular individual
or entity. Although we endeavor to provide accurate and
timely information, there can be no guarantee that such information
is accurate as of the date it is received or that it
will continue to be accurate in the future. No one should act on such information
without appropriate professional advice after a thorough
examination
of the particular situation.
KPMG and the KPMG logo are registered trademarks of KPMG
International, a Swiss cooperative.
© 2006 KPMG LLP, the
Canadian member firm of KPMG International,
a Swiss cooperative. All rights
reserved."
|
|
|
