The 2016 US election results are “in the books”, and Donald Trump is the President-elect of the US. But the battles over US tax policy will likely be fought long after the votes have been counted. Some tax changes may be determined by compromise due to the complex system of checks and balances in the US political system.
The tax changes could affect the (estimated) one million U.S. citizens living in Canada, who are subject to the US tax rules. But they could also affect larger Canadian estates that hold certain U.S. assets.
President-elect Trump favours an outright repeal of US estate taxes. His opponent, Hillary Clinton, supported tax hikes on high income earners (including a 24% capital gains tax rate). Hilary Clinton also wanted to return US estate and gift tax exemptions back to 2009 levels, when the exemption was $3,500,000 (USD).
Larger Canadian estates can be subject to US estate tax if they hold US assets, including US real estate and certain US securities – even if the deceased is not a US citizen.
The taxable estate value generally includes:
- Life insurance;
- Principal residence;
- Assets or investments, whether there is a gain or not;
- Items that might be tax-deferred from a Canadian tax perspective, such as a “rollover” of an RRSP from a US citizen to a spouse who is not a US citizen;
- Liabilities are generally not considered.
The lifetime exemption amount must be reduced by gifts made throughout the deceased’s lifetime, including gifts to a spouse who is not a US citizen.
- Five years ago, Karen (a U.S. citizen living in Canada), gave her shares in her Canadian company to her husband Jim (not a U.S. citizen). This was a tax-free rollover from a Canadian tax perspective, since they were both residents of Canada. If Karen should die, her estate would be subject to US estate tax rules because she was a US citizen. If the shares she gave to Jim were worth $2 million USD, and if her life insurance paid $4 million USD, her estate would be subject to US estate tax, even under the current rules, because the total estate exceeded the $5.49 million exemption.
- Jim (not a US citizen) dies with a $6 million estate, which includes valuable US real estate investments as well as life insurance. Jim’s estate must pay US estate taxes on a portion of the US real estate value, because the total estate exceeded the $5.49 exemption (USD).
The Canada-US tax treaty may provide relief to some “Canadian” estates. However, the differences in the two tax systems can give rise to surprising tax results.
With the exemption at $5.49 million (USD), estates are often below the US estate tax exemption amount. But if the exemption is lowered to $3.5 million (USD), more Canadian executors might be visiting Uncle Sam to pay their US estate tax bill.
Fall 2016 DFK Newsletter Article
Other articles in this issue: Amendments to the Principal Residence Exemption Rules | How Much Is Your Business Worth?
Author: Geoff Brookes, CPA, CA. Pope & Brookes LLP Chartered Professional Accountants