Marc André Castonguay, CFP, CIM
June 3, 2023
Here's how death can trigger U.S. taxation for Canadian residents who are not U.S. citizens.
I’m sure you’ve heard this Benjamin Franklin quote before: “In this world nothing can be said to be certain, except death and taxes.” Many Canadians are aware that their death could have tax consequences because of the deemed disposition rule applicable to their assets that could result in capital gains, or the income inclusion of their RRSP or RRIF. But did you know that if you own U.S. property, there could be taxes triggered in that country as well, even if you are not a U.S. citizen? Before getting into the heart of the subject, it’s important to note that this article addresses U.S. tax implications for Canadian residents who are not U.S. citizens. If you are a U.S. citizen, different rules will apply.
In the United States, an estate tax is applied on the fair market value of a deceased person’s assets. Even if you are not a U.S. citizen, an estate tax on your U.S. assets could still apply. Canadian residents who own U.S. situs property worth more than $60,000 US have an obligation to file a U.S. estate tax return within nine months of the date of death. Such property includes real estate in the U.S. like a winter home or condo, and U.S. stocks and mutual fund units held in personal investment accounts, including RRSPs, RRIFs and TFSAs. Canadian mutual funds or ETFs that hold U.S. securities are not considered as U.S. situs property.
Rest assured, even if you own U.S. situs property worth more than $60,000 US, this does not mean there will be taxes payable since Canadians can benefit from certain exemptions under the Canada-U.S. Tax Treaty. However, to benefit from those exemptions, the U.S. estate tax return must be filed.
A full exemption of the U.S. estate tax will apply if the deceased individual’s worldwide estate value (not just the U.S. assets) does not exceed the exemption amount, which is $12,920,000 US in 2023. If a Canadian resident with more than $60,000 in U.S. property has a worldwide estate worth more than the exemption amount, then there will be a U.S. estate tax liability on that individual’s U.S. situs property. If the Canadian resident is married and the spouse inherits the U.S. situs property of the deceased, an additional marital credit will be available which will help reduce or eliminate the estate tax.
Some may think that to avoid a potential U.S. estate tax liability, the Canadian resident should gift the U.S. situs property prior to death, to the individuals who would inherit it. But doing so could trigger another type of tax, the U.S. gift tax which is imposed to the donor. Unlike U.S. estate tax, there is no relief for U.S. gift tax under the Canada-U.S. Tax Treaty. However, there is an annual exclusion amount for this type of tax. In 2023, gifts made to one individual not exceeding $17,000 US will not be taxed. If the gift is worth more than the annual exclusion amount, the gift tax will apply to the amount gifted in excess of the annual exclusion amount. If the Canadian resident makes a gift to his or her spouse who is not a U.S. person, the annual exclusion amount is $175,000 US in 2023.
For non-resident aliens (NRAs) such as Canadian residents who are neither U.S. citizens nor U.S. residents, the gift tax does not apply to “intangible property” which includes U.S. stocks, even if the estate tax applies on those assets. However, the gift tax applies on real estate property.
Tax law is complicated enough when it is limited to Canadian tax. Adding another jurisdiction’s taxes to the mix increases the complexity. This article is not meant to do a deep dive into U.S. taxes but rather to raise awareness for Canadian residents who own U.S. property and for the executors of such individuals. The main takeaways are that if you own U.S. situs property worth more than $60,000 US at death, there is an obligation to file a U.S. estate tax return. Whether estate tax will apply will depend on the value or your worldwide assets and the exemption amount at that time. And if you are considering gifting U.S. assets, watch out for the U.S. gift tax. When dealing with these situations and to plan to minimize the tax impact, you should consult a tax expert or estate planner who is familiar with U.S. tax law.
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This writing is for general information purposes only and is not intended to provide legal, accounting, tax or personalized financial advice. If you are not sure how to proceed with a request for further information, seek help from a professional. Any opinions expressed are my own and may not necessarily reflect those of Louisbourg Investments.