If you own property or other investments south of the border, you probably know that the U.S. has an estate tax. What you may not know is that U.S. tax law has changed recently and those changes have an impact on Canadians with substantial U.S. investments.

On New Year’s Day, 2013, the U.S. Congress passed The American Taxpayer Relief Act of 2012 that clarified and simplified the rules governing U.S. estate taxation. If the act had not passed, the threshold at which estate tax would begin for U.S. property/investments was set to drop to $1 million at the start of 2013. For Canadian residents claiming protection under the Canada-U.S. Tax Treaty, that would have resulted in U.S. tax exposure on any U.S.-situs assets – which includes shares or bonds of U.S. corporations, real estate located in the U.S., and personal property such as cars and other belongings in the U.S. – when the value of their worldwide estate exceeded $1 million in U.S. dollars.

The good news is the American Taxpayer Relief Act increased U.S. estate tax credits to $5.25 million U.S. (indexed for inflation) – meaning that the estate of a U.S. citizen or U.S. resident is exempt from tax to the $5.25 million threshold. For a Canadian resident, who is not a U.S. citizen, the Canada-U.S. Tax Treaty completely shields U.S.-situs assets from estate taxes when a Canadian’s worldwide estate is less than $5.25 million. A Canadian couple could exclude $10.5 million from U.S. estate taxes. However, for an individual Canadian resident (including a last surviving spouse) with an estate in excess of $5.25 million, U.S. estate tax is still a concern.

Canadian residents, with a substantial worldwide estate, have several strategies available to them that can reduce U.S. estate tax, such as:

  • Having the spouse with the smaller worldwide estate acquire the U.S.-situs assets.
  • Making gifts of non-U.S. assets to children (but watch out for capital gains).
  • Assigning life insurance policies to a spouse or children (taking into account the three year look-back rule).
  • Reducing U.S.-situs assets by purchasing them through Canadian mutual funds – for example, instead of holding direct ownership of U.S. stocks, you can still gain exposure to the U.S. stock market, and avoid estate tax issues, through Canadian-based mutual funds.
  • Selling U.S.-situs assets other than real estate.
  • Selling U.S. real estate to children for fair market value.
  • Establishing qualified discretionary domestic/family trusts.

Even if your worldwide estate is below the $5.25 million exemption level, it still pays to plan ahead — to be sure that your estate is distributed just the way you want, and in the most tax-efficient way. Get solid estate and other financial planning advice from your professional advisor as soon as possible.

This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.

Contact David Brown at 250-315-0241 or at [email protected] to book your appointment.