By David Cieslowski, CPA, CA, CFP, CIMA
As Benjamin Franklin famously wrote, “… in this world, nothing is certain except death and taxes.” For US citizens, as well as some Canadians who own US assets, the first may be swiftly followed by the second.
In the United States, an estate tax is applied to the transfer of the taxable estate of every deceased American citizen, resident or non-resident, including green card holders or others with dual US-Canadian citizenship. Even Canadian citizens who have never stepped foot in the United States, but hold US securities or other US assets, could find their estates subject to a tax on situs assets, which are defined as assets with a tangible or intangible direct US connection or location.
The low-down on US estate tax
Estate tax falls into the category of transfer taxes, as opposed to income tax. It can be substantial; those in the top marginal tax bracket may pay up to 40% on estates with assets of more than US$1 million. Moreover, for US citizens and residents this tax applies to assets held worldwide. Real estate ownership alone can easily exceed those limits.
Fortunately, the reality is somewhat more encouraging. Only around 2% of the US population actually pays estate tax, largely because of exclusions that effectively spare all but the largest estates.
The two most common exclusions are:
- Annual exclusion of US$15,000 per person
- Lifetime credit of US$11.7 million for 2021 and indexed annually. Something of a political football, this credit can rise or fall along with changes in government. The current credit limit is set to expire at the end of January, 2025.
These annual exclusions are portable, meaning they can be used by any descendant of the deceased.
The gift that keeps on giving: to the IRS
In the battle of wills between those determined to transfer all of their wealth to succeeding generations and those determined to “tax to the max,” many strategies have been tried and failed. Gifting assets to relatives while the owner is still alive has been one of the more popular tactics. Not surprisingly, the IRS employs two additional taxes to thwart such attempts at tax-free wealth transfer.
The first is a garden-variety gift tax. For non-spouses, annual exclusions are the same as for estate taxes. For spouses they are more generous: unlimited for spouses who are US citizens and $159,000 for 2021 (indexed annually) for spouses who are not.
The second is the colourfully named generation skipping tax. This one is specifically designed to prevent the wealthy from avoiding estate tax by making a gift or bequest to a grandchild, great-grandchild or otherwise “skipped” generation. The age cutoff point is explicit; it applies to relatives who are at least 37.5 years younger than the deceased. Exclusions and lifetime credit amounts are similar to those of the other two transfer taxes.
Canadian citizen? Your US assets may be subject to estate tax
Granted, death rarely figures into the initial plans of most people buying a vacation property, acquiring a business property or investing in the stock market. But if you are a Canadian citizen, it’s important to know that upon your death, your US assets could be subject to US estate tax, even if held by a Canadian financial institution.
If, for example, you hold US securities in your Canadian investment account, those assets would fall into the US situs category, even when held within the tax-friendlier confines of an RRSP or TFSA. Mutual funds, though, are an interesting exception; if your Canadian-domiciled mutual fund holds US securities, those assets are considered exempt.
Even in death, time is of the essence
If you are heir to a taxable US estate, there’s no time to waste; estate taxes generally must be paid within nine months after death to avoid incurring a penalty.
For your own estate planning, make sure you factor in the potential cross-border tax implications. It’s one of the surest ways to increase the probability that the lion’s share of your wealth will flow to your heirs and the causes close to your heart.
Cross-border taxation is a highly complex undertaking that can be a minefield for the uninformed. Whatever your situation, it’s always wise to consult a tax professional with expertise in both countries.
 With the Biden administration taking office in January 2021, the lifetime credit amount could change.
David Cieslowski, CPA, CA, CFP, CIMA, is a Vice President and Private Wealth Counselor with Fiduciary Trust Canada, part of the Franklin Templeton group of companies. Dave brings over 20 years of investment and financial planning experience to his role at Fiduciary Trust Canada. Mr. Cieslowski has held various positions with major Canadian banks and investment firms, specializing in delivering financial planning, taxation and high net worth client solutions. He graduated from the university of Toronto with a bachelor of commerce in 1993. He went on to earn the chartered accountant designation in 1996, the certified financial planner designation in 1999, as well as the certified investment management analyst designation in 2005. Dave has also completed the CICA in-depth tax course and level I of the chartered financial analyst designation.
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