Canadians Owning U.S. Real Estate – U.S. Estate Tax Exposure

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:

chart-14

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:

chart-22

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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These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.

10 replies
  1. Jim Wells says:

    Hi. We have bought 2 properties in Florida and are just wondering about the best way to set it up for tax reasons and also estate purposes.Can this all be done from Canada or do we need to find accountants and lawyers in Florida to set it up.Thanks Jim Wells

    Reply
  2. Brent Soucie says:

    Hello Jim,

    Congratulations on your new purchase(s). Each of the above-noted strategies has its own pros and cons. What would work best for you thus depends on your independent facts and circumstances. If, for example, your estate tax exposure is low, one of the simpler and less costly alternatives (i.e. – life insurance or a non-recourse mortgage) would be most suitable. If on the other hand your estate tax exposure is high, one of the more complex planning strategies (i.e. – a Canadian Holdco or a Canadian trust) could better suit your needs.

    In any case, it is certainly possible to find service providers here in Canada. We here at T.E. Wealth have the ability to assist to a certain extent, and can put you in touch with local lawyers, accountants, and/or insurance providers who can further assist you if need be. We work with multiple practitioners in each field, and are happy to take on a coordination role.

    Please feel free to contact me should you wish to discuss your specific level of US estate tax exposure.

    All the best,

    Brent.

    Reply
  3. Dave says:

    In Arizona is it better to register the title as Joint Tenancy with right of survivorship or Community Property with right of survivorship if we are married and Canadian?

    Reply
    • Brent Soucie says:

      Hello Dave,

      Glad to meet you. It’s difficult to give you a direct answer without knowing your facts and circumstances. There are certainly advantages to owning the property as community property with right of survivorship; however, some of those advantages are not relevant if you and/or your wife do not have any U.S. estate tax exposure. Your estate tax exposure depends on a number of factors, including your residency, your citizenship, your net worth, and the value of the property. Please feel free to contact me should you wish to discuss specifics.

      Brent

      Reply
  4. Wayne Gregory says:

    Brent,
    My wife and I are co-owners of a Florida property worth about $250,000 US, and the deed has right of survivorship upon one of ours death, plus our wills leave all assets to each other. I have recently been diagnosed with a cancer that I only have about a 10% chance of long term survival. I am paranoid about the IRS trying to charge estate taxes on my worldwide estate (which is considerable). My question is whether it is safe to leave matters as be until my death, or should I transfer ownership of the Florida property either solely to my wife, or to joint ownership of my wife and one of my adult children? I am a Canadian citizen and resident

    Reply
    • Brent Soucie says:

      Wayne,

      I am sorry to hear of your condition. Stay strong, and hopefully things will work out for the best. As for your questions, firstly, as you are not a US citizen, not a US resident, not US domiciled, and not a US greencard holder, the IRS has no right to tax your worldwide assets. They do however have a claim on your U.S. situs assets (Ie – your Florida property, as well as any U.S. based investments that you may have). I do not recommend transferring the property to your wife, nor gifting it outright – gifting U.S. real estate is one of the worse things a Canadian resident can do from a tax standpoint – such potentially creates three layers of tax (U.S. gift tax on the transfer, Canadian capital gains tax on the deemed disposition, and U.S. capital gains and/or estate taxes upon ultimate sale or passing). Your options are to either sell the property to your wife or another family member, or to sell the property to a trust. If you would like to discuss and/or analyze these options in detail, feel free to give me a call.

      All the best,

      Brent

      Reply
  5. amy says:

    Hi there! came across this blog, very informative. I am canadian citizen and resident. My daughter is Canadian citizen and resident. She just got physician residency spot in MICHIGAN hospital. She is holding J1 visa which is for a year. Residency program is for 3 years, usually visa gets renewed every year. By law she has to return to her home country within 7 years unless she gets J1 waiver.

    I am thinking of purchasing townhome/condo in Rochester hills MI…my dilemma is under whose name should I purchase. how I benefit tax wise..is it advisable to buy in joint name my and Daughter name? – If my daughter purchases…are we breaking any US laws? I am working in TO my husband is retired (senior citizen) thank you in advance

    Reply
    • Brent Soucie says:

      Thank you for your compliments, and for your questions. It is certainly possible (not against the law) to purchase the home in joint name. In other words, you won’t be breaking any laws in doing so. That said, owning US real estate opens all owners up to US taxation (including US income tax on any gain upon sale, and potentially even estate tax – depending on your net worth and the laws in effect down the road). My advice would really depend on your ultimate goal(s) associated with the property – certainly putting it in joint name can alleviate considerations such as probate, but there is also a case to be made for simplicity. If you would like to discuss the merits and drawbacks of each approach, please feel free to contact me – I would be happy to book a consultation at your convenience.

      Brent

      Reply
  6. Ara says:

    Hi Brent

    I’m Canadian and my spouse is American. We want to purchase a house in the US.

    Any implications for me if

    A. I had my name on the title, not the mortgage?
    B. Gave a $X gift towards the purchase from a Canadian account?

    Many thanks

    Reply
    • Megan says:

      Hello again Ara – I believe we have in touch via email. In any case, I will respond to your post here so that others can see.

      The short answer to your question is yes – there are implications to sharing title of the property, as well as sharing the mortgage. In terms of which is best and/or gifting strategies – it really depends on the value of the house, and (not to be overly intrusive, but) your net worth. Both factor into financial considerations such as the U.S. estate tax, and your respective exposure.

      If you would like to discuss your situation in more detail, please feel free to reach out, and we can discuss the merits of a tax consultation ont he matter.

      All the best,

      Brent

      Reply

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