US Estate Tax for Canadians and Other Cross Border Tax Issues

US Estate Tax for
Canadians and Other
Cross-Border Tax
Issues
Estate Planning Council of Abbotsford
June 19, 2013
Benita Loughlin, KPMG LLP

© 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.
All rights reserved.
Restrictions and Limitations
1
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE
USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE
PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii)
PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED
HEREIN.
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.
Any advice herein is based on the facts provided to us and on current tax law including judicial and
administrative interpretation. Tax law is subject to continual change, at times on a retroactive basis
and may result in incremental taxes, interest, or penalties. Should the facts provided to us be
incorrect or incomplete or should the law or its interpretation change, our advice may be
inappropriate. We are not responsible for updating our advice for changes in law or interpretation
after the date hereof.
KPMG’s advice is for the sole use of KPMG’s client. The advice is based on the specific facts and
circumstances and the scope of KPMG’s engagement and is not intended to be relied upon by any
other person. KPMG disclaims any responsibility or liability for any reliance that any person other
than the client may place on this advice.

2
US Vacation Property
 Estate tax is the biggest concern Canadians have
 No US estate tax if worldwide assets US$5,250,000 or less (because of Canada-US
Treaty credit)
 If married, worldwide assets of first to die can be about US$10,000,000 without
estate tax applying (because of Canada-US Treaty marital credit) if property
transferred to surviving spouse (no estate tax if surviving spouse is a US citizen)
 Maximum rate is 40%
 US estate tax on first $1,000,000 is $345,800; any excess value is taxed at 40%
 The lifetime exemption amount for US citizens is $5,250,000 which is equivalent to
$2,045,800 of estate tax (the applicable credit amount)
 Canadians are allowed a pro-rata portion of the exemption amount based on US
assets divided by worldwide assets

3
Example #1
 Michael has worldwide assets valued at $7,000,000
 Vacation home in US valued at $2,000,000
 Shares of Apple valued at $1,000,000
Estate Tax on $3,000,000
On first $1,000,000 $ 345,800
On $2,000,000 at 40% 800,000
Total estate tax before credits 1,145,800
Treaty credit is 3/7 x $2,045,800 < 876,771 >
Net estate tax payable $ 269,029
 If married an additional $876,771 credit available (or $269,029 in this example)
 If not married or transfer property to children then estate tax will be payable
because worldwide assets > $5,250,000
 If married and property to spouse then no estate tax because worldwide assets <
$10,000,000
 In many cases surviving spouse will sell before death

4
Example #2
 George owns a home in Arizona valued at $4,000,000
 George has worldwide assets valued at $20,000,000
 George dies and leaves his assets to his spouse, Gina
Estate Tax on George’s Death
On first $1,000,000 $ 345,800
On $3,000,000 at 40% 1,200,000
Total estate tax before credits 1,545,800
Treaty credit is 4/20 x $2,045,800 < 409,160 >
Treaty Marital Credit < 409,160>
Net estate tax payable $727,480

5
Alternatives to Minimize or Eliminate US Estate Tax Exposure
 Play the odds
 Spouse with lower worldwide assets buys US assets (with own funds)
 Joint ownership (each with own funds)
 Sell after first to die
 Canadian company (if mostly rental)
 Non-recourse debt (never actually use)
 Life insurance
 Donation to US charity
 Canadian Trust (properly structured)
 Canadian Limited Partnership (with US check-the-box election)
 Minimize assets of surviving spouse with spouse trust (with no general power
of appointment)
 Transfer US property to trust for surviving spouse (with no general power of
appointment); structure to qualify for treaty marital credit

6
Canadian Trust for US Vacation Property
 Establish trust before looking for property
 One spouse is the settlor
 The other spouse is the life beneficiary
 The settlor is neither a beneficiary nor a trustee
 The trust is settled with cash
 Children are the remainder beneficiaries
 Pay rent after beneficiary spouse dies
 Individual capital gains rate on gain
 Can avoid 21-year rule if structure as spouse trust
 Settlor has to part with the cash
 Need to be married
 No US estate tax

7
Canadian Limited Partnership for US Vacation Property
 Elect to treat partnership as corporation for US tax purposes (check-the-box
election)
 Avoids US estate tax (property is owned by Canadian corporation for US tax
purposes)
 No shareholder benefit rules because partnership for Canadian tax purposes
 Need some type of “business” in the partnership (e.g., stock portfolio, LP
interests or rental income)
 Corporate tax rate on capital gains realized
 Can transfer property already owned to the Canadian limited partnership but
preference is to set up before purchase

8
US Citizens Resident in Canada
 Born in the US = US citizen
 Can renounce US citizenship
 Possible retroactive determination of loss of citizenship (depends on facts)
 Subject to US income tax, estate tax, gift tax and generation skipping transfer
tax on worldwide income/assets
 File US tax returns, all related forms and foreign bank account reporting forms
 Estate planning should take into account US citizenship

9
Renouncing US Citizenship
 Need appointment at consulate (need prior legal advice)
 Deemed disposition of assets at fair market value
 Immediate recognition of certain deferred compensation/pension amounts
(including stock options, RRSP and non-US pensions)
 $668,000 tax-free capital gains (not for deferred compensation/pensions)
 US heirs subject to US estate and gift tax (forever)
 Exception if:
< $2,000,000 net worth; and
Filed last 5 years of tax returns; and
Average annual US tax liability less than $155,000
 Exception if:
Dual from birth; and
Reside in the other country; and
Not US resident in 10 of the last 15 years
 Exception if:
Under age 18½

10
Renouncing US Citizenship - Planning
 Use $5,250,000 exemption to reduce net worth below $2,000,000
 Check dual from birth exception
 Check amount of gains
 Match timing of US and Canadian tax (e.g. withdraw RRSP, exercise stock
options, reorganization of corporate structure)
 Retroactive determination of loss of citizenship
 Deal with children before age 18½

11
US Citizen with Residence with Accrued Gain
 In Canada can use principal residence exemption for main home or vacation
home (not rental property)
 Gain in excess of $250,000 taxable in US
 Use lifetime gift tax exemption amount to transfer house with accrued gain to
non-US citizen spouse before sale
 Current long term capital gains tax rate 20% in US; Canada is nil
 Structure will so house not bequeathed to US citizen spouse

12
US Citizen Estate Planning
 Reduce worldwide assets
 Do not increase worldwide assets
 Estate freeze results in gift for US tax purposes
Preferred shares deemed to have zero value unless fixed cumulative
dividend
 Use annual gift tax exemptions
$14,000 to anyone
$143,000 to non-resident alien spouse
 Pay tuition and medical expenses directly
 Establish trust in will of non-US spouse so that assets not included in estate of
US surviving spouse
No general power of appointment
Spouse can’t be sole trustee with unlimited capital encroachment powers
 Establish trust in will of US spouse (up to exemption amount) so that assets
not included in estate of US surviving spouse; keep increase in value out of
US estate tax
 Use $5,250,000 lifetime gift tax exemption amount for assets that will increase
in value

13
Canadian Trusts with US Beneficiaries
 All income retained in trust is taxable to a US beneficiary when eventually
distributed
 For US purposes cannot designate a distribution as a distribution of capital
 For US purposes current year income is distributed first, then accumulated
income and finally capital
 Even if the beneficiary is only a capital beneficiary (trust law vs. tax law)
 Any accumulation distribution is treated as having been made over the term
the trust existed
 US tax is calculated on the amount allocated to each year as if it was earned
in that year

14
Accumulation Distribution Example
 Trust created 10 years ago with $1
 Trust earned $10,000/year of dividend income
 Trust paid Canadian tax of $2500/year
 Distribution of $75,000 in Year 11
US beneficiary reports $ 75,000
Gross-up for tax paid by trust 25,000
Income reported on US return $100,000
US tax calculation $ 35,000
Foreign tax credit 25,000
Net US tax owing $ 10,000
 Interest is charged on $1000/year of US tax for 10 years, 9 years, 8 years
etc…in some cases the US tax plus interest is more than the distribution

15
How to Deal with Potential US Beneficiaries of Canadian Trusts
 Do not include any US beneficiaries
 Do not make distributions to US beneficiaries
 Provide in trust that US beneficiaries not entitled to any distributions
 Distribute all trust income including capital gains every year
 Distribute all trust income including capital gains before beneficiary moves to the
US
 Distribute all income including capital gains to Canadian beneficiaries in Year 1
and then distribute to US beneficiaries in Year 2
 Careful bookkeeping (tracking trust income and taxes paid each year) – in many
cases enough Canadian tax was paid to eliminate US tax
 If records not available use “default method” to determine accumulation
distribution – can improve result by making distributions over several years

16
Provide Flexibility in Trusts
 Trust can move to another jurisdiction (i.e. to US if US beneficiaries)
 Trust can be split if some beneficiaries are in the US
 If US is a possibility provide that a court within the US is able to exercise
primary supervision over the administration of the trust if trust to become US
resident (need to meet court and control test to be considered a US resident
trust)
 For 21-year rule (in order to have Canadian resident beneficiary):
Distributions can be made to entity wholly owned by beneficiary
Beneficiary can transfer interest in trust to wholly owned entity
Create the entity (ULC) and make it one of the beneficiaries

17
Alter Ego Trusts
 Do not use for US assets
 Canadian tax on death payable by trust
 US estate tax payable by settlor
 No offsetting credits in Canada because different taxpayers
 US will allow credit for Canadian tax on Canadian assets
 Ok to use if no estate tax payable

18
Holding Companies
 US citizens do not benefit from holding companies
 US anti-deferral rules similar to FAPI
 No integration in US
 Consider ULC
 Restructure before death if US heir
 Restructure in estate if US heir (foreign estates are subject to less onerous US
rules than trusts)

19
Delinquent US Filers
 Need to deal with the issue
 The issue won’t go away
 Fix it and then renounce if don’t want to be a US citizen
 IRS streamlined process simpler/less costly than Offshore Voluntary
Disclosure Initiative

20
Greencard Holders
 Greencard holder = US resident
 Even if greencard no longer valid for immigration
 Required to file US tax returns
 Expatriation rules apply if greencard held in 8 or more of the last 15 years at
time of surrender
 Tie-break to Canada using treaty, surrender greencard at border or greencard
confiscated = expatriation
 Deemed disposition of assets/recognition of pension value – same as US
citizens renouncing
 Nexus application will identify greencard holder

21
Summary
 Determine US estate tax exposure
 Ask about US citizenship
 Ask about greencards
 Ask about US residents in family
 Lots of opportunities to plan for tax minimization but opportunities are better
before death, expatriation, freeze, distribution, reorganization etc

Thank You
Presentation by Benita Loughlin
KPMG LLP
benitaloughlin@kpmg.ca

© 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated
with KPMG International Cooperative (KPMG International), a
Swiss entity. All rights reserved. Printed in Canada
The KPMG name, logo and "cutting through complexity" are registered
trademarks or trademarks of KPMG International Cooperative (KPMG
International).

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