U.S. estate tax is levied upon the death of an individual. Graduated rates are applied to the fair market value of the individual’s taxable estate. The same rates apply whether the individual is a U.S. citizen, U.S. resident, or a non-resident. That said, non-residents of the U.S. are only taxable on the value of their U.S. situs property (U.S. persons are taxable on their worldwide assets). The following table summarizes common assets that constitute U.S.situs property, and common assets that do not:
Taxpayers receive a unified credit that they can apply against their U.S. estate tax . This credit is equal to the amount of estate tax that would be levied on $5,250,000 USD (2013) of assets. Non-residents of the U.S. receive a pro-rated unified credit. The proration is equal to the value of the individual’s U.S. situs assets, divided by the value of their worldwide assets. Here is an example of how the proration works:
Assume a taxpayer owns U.S. real estate worth $1,250,000 USD, has worldwide assets of $5,500,000 USD, and holds a life insurance policy worth $400,000 USD. U.S. Estate Tax is computed at the rates noted to the left.
Using these rates, the tentative estate tax on $1,250,000 of U.S. property is $445,800 (($1,250,000 – $1,000,000) x 40% + $345,800). The 2013 unified credit is $2,045,800 (($5,250,000 – $1,000,000) x 40% + $345,800). This taxpayer’s unified credit would thus be $433,432 ($2,045,800 x $1,250,000 / ($5,500,000+$400,000 of life insurance)). As such, this taxpayer’s U.S. estate tax exposure would be $12,368 ($445,800 – $433,432).
If the value of a non-resident’s U.S. situs assets is less than $60,000 USD, there is no need to file a U.S. estate tax return, nor pay U.S. estate tax. The Canada-U.S. Income Tax Convention (The Treaty) also provides a marital credit for U.S. situs assets that pass to a spouse on death. The marital credit equals the lesser of the unified credit and the amount of the applicable estate tax. The Treaty also provides further relief, as U.S. estate tax payable upon a taxpayer’s demise is typically eligible as a credit against Canadian income tax levied on a terminal Canadian tax return (to the extent that the taxpayer’s income includes U.S. source gains).
There are several ways for Canadians to mitigate their U.S. estate tax exposure, including joint ownership of assets with each co-owner paying for his or her share, the use of a Canadian discretionary trust to hold U.S. real estate, the use of a Canadian holding company to hold U.S. stock, buying U.S. investments through Canadian mutual funds, taking out non-recourse debt to reduce the taxable value of U.S. real property, taking out life insurance to fund the estate tax liability, or renting/leasing assets such as U.S. vacation property, rather than owning them.
Personable and professional, Brent Soucie specializes in cross-border tax and financial planning for U.S. citizens and/or Greencard holders residing in Canada, as well as Canadian residents with U.S. employment and/or property. His clients include professional athletes, entrepreneurs, and corporate executives.
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