Last week, we chatted about the harsh US tax implications for US citizens living in Canada. Today we’ll talk about your exposure as Canadians and strategies to minimize the hit.
Did you know that even as Canadians, if we die owning U.S. assets – such as stock of a US company, a condo in Florida or a sweet car in California – we may be subject to US estate tax even though we aren’t US residents, citizens or green-card holders?
For Canadians, U.S. estate tax applies only on the right to transfer “US situs assets” upon your death. US situs assets are assets that have a US location or connection (such as US real estate, shares in a publically traded US corporation held in a brokerage account in Canada or outside of Canada, tangible property situated in the US, and much, much more – click here for the full list on page 3). That said, you will likely only be exposed to U.S. estate tax if you meet two thresholds in the year of your death: If the value of your worldwide estate is greater than US$5.34 million upon your death, and the value of your U.S. situs assets at that time is greater than US$60,000.
So, what can you do to minimize your exposure to US estate tax?
- You can claim foreign tax credits for US estate tax
- You can make alternative investment choices
- Gift US situs assets prior to your death
- Transfer US situs assets to a spouse at FMV at death
- Purchase an irrevocable life insurance trust (ILIT)
- Use the qualified domestic trust (QDOT) or marital tax credit
- Hold US situs assets in a Canadian corporation
- Make charitable donations
- You can make alternative investment choices
- Gift US situs assets prior to your death
- Transfer US situs assets to a spouse at FMV at death
- Purchase an irrevocable life insurance trust (ILIT)
- Use the qualified domestic trust (QDOT) or marital tax credit
- Hold US situs assets in a Canadian corporation
- Make charitable donations
These strategies (and more listed here starting on page 5) may or may not be right for you – ask me about the US estate tax calculator for Canadians to learn more and speak with a qualified accountant.
Now, let’s talk about considerations you need to be making which would affect your reporting obligations – while you are alive and well as a frequent snowbird. If you are a Canadian resident who spends a considerable amount of time in the US (to avoid winters like the one we just had), you may be surprised to know that your presence in the US, even if you are there only to soak in the sun, could create US income tax and other reporting obligations if your US residency status is “US resident alien”.
In order to determine your U.S. residency status, the IRS applies a test known as the “substantial presence test”. This test averages the number of days you were present in the U.S. during the past three-year period, beginning with the current year. Fortunately, there are circumstances where you may be exempt from the status of U.S. resident alien under the substantial presence test and may not have to file a US resident tax return (Form 1040). However, failure to understand the US tax obligations imposed by the IRS may result in unpleasant surprises and costly penalties. Click here to learn more.
I’ve got to run to a event at the iYellow Wine Club tonight and even though I am running late, I am refusing to take cab because of the horrifying beck taxi experience I had last night. It’s true when they say that word of mouth can really affect a business…