U.S. Gift and Estate Taxes for Canadians

Allan Madan, CA
 Jul 15, 2015
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If you are a Canadian citizen who has properties you want to give away in the United States, and if you know anyone who is deceased and thinking of transferring property, you may want to know about the tax implications surrounding how U.S. gift tax and estate tax affects Canadians. U.S. gift tax system creates complications and affects Canadian taxpayers.

The article “U.S. Taxes for Canadians with US assets” discusses the implications of gift tax, estate tax, and generation skipping transfer tax.

Gift Tax

Transfers of property in the U.S. are subject to U.S. tax law. A Canadian who owns U.S. Situs property is also subject to U.S. gift tax but do not include intangible assets like U.S stocks, bonds, and trusts. Exemptions to the taxable gifts are U.S. Citizen Spouses, non-citizen spouses up to U.S. $147,000 annually and anyone else up to $14,000 per recipient annually.

Canada and the United States impose different methods of taxation for U.S. Gift Situs property with unrealized capital gains. The varying methods are how U.S. gift tax affects Canadians. Donors with unrealized gains are not affected under the U.S. gift tax law. The recipient acquires the property at the adjusted cost base. The receiver will incur the capital gains tax on the growth of the entire life of the asset during disposition. With the Canadian tax system, a gift is a transfer that requires the donor to realize a net capital gain when the gift is made. The contrasting methods can cause double taxation.

Gift and estate tax rates are cumulative and start at 18% and rise up to 40%, the 40% rate only applies when the total gifts made over the lifetime exceeds one million dollars. You can find unified tax credits are available for Americans and Canadians under the Canadian and U.S. tax treaty. TaxTips discusses the tax brackets in more detail.

The treaty address issues of how U.S. gift taxes affect Canadians. For gift tax purposes, Article XIII-7 of the Canada-U.S. treaty lets the donor elect the Canadian owned asset as if it was sold and repurchased before the gift transfer. Furthermore, a Canadian taxpayer would use foreign tax credits to reduce taxable amounts.

Canadian taxpayers who own a vacation home may be interested in reading more here at Madan Chartered Accountants.

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Estate Tax

All U.S. properties left behind are assessed at fair market value and deductions applied may reduce the value. The U.S. situs assets for estates include intangible assets. Primary examples are shares of U.S. Corporations. Additionally, intangible assets that are exempt for estates are specific holdings with life insurance firms.

There is a $13,000 estate tax credit up to an allowable maximum at $60,000 on U.S. situs assets. Up to this threshold the executor is exempt from filing a U.S. estate tax return. Professional advice can be found on Madan to provide additional tax advantage to individual tax situations, such as using two tier partnership.

When the executor is required to file an estate tax return, the tax purpose is assessed on provisions of the treaty. Canadians with exposure to U.S. estate tax can benefit from the treaty with the unified tax credit which is based on the value of the deceased’s U.S. situs assets that bears to the value of their worldwide estate.

Like gift tax, U.S. estate assets that have capital gains are generally taxed on the entire value of the property upon death while a deemed disposition occurs under the Canadian tax system, which results in double taxation.

The treaty grants foreign tax credit for any U.S. estate tax imposed on disposition under the Canadian law. According to the treaty section P.6 (a) (ii), a relief from double taxation may arise for U.S. situs properties if the value is greater than $1.2 million. Additional credit is obtained under treaty section P. 6(a) (i) towards US estate tax on US situs properties used in a business. Canadians can also take advantage of foreign tax credits that exists for specific provinces to reduce overall tax liability.

A deceased Canadian’s estate is subject to death taxes within specific states in America. Inheritance tax exists in seven states.

Generation Skipping Transfer Tax

The United States imposed the generation skipping transfer tax is taxed at 40%. The 2015 exemptions limit is $5.43 million. This tax and exemptions apply towards any gifts and estate beneficiary who is at least two generations younger than the transferor. The $5.43 million is allowed separately from the unified credit.

The Canada-U.S. tax treaty provides fundamentals on preventing double taxation on U.S. owned assets for Canadians. Raising adequate revenues for the U.S. federal and states is an ongoing procedure that emphasizes the importance of being unexpectedly subject to U.S. Taxation.

Various methods can be used to reduce taxes; however, a clear understanding is needed to apply them. As a primer, there is an article provided by the Globe and Mail which summarizes the possible tax implications. You can learn more by reading this article titled “How Canadians, too, can fend off the long arms of the IRS”.

US gift tax have major impacts on Canadian citizens who have transferrable property, so proper planning can identify individual tax situations and reduce the risk of over taxation!

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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