U.S. estate tax update
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Non-U.S. citizens and individuals who are not domiciled in the U.S. at the time of death are subject to U.S. estate tax on the value of their U.S. assets as of the date of death |
U.S. estate tax is a concern to Canadians when Canadians die holding certain U.S. property. Canadians may unwittingly have an exposure to U.S. estate tax because of ownership of U.S. real estate or stock in U.S. companies. For example, a Canadian executive who works for a U.S. owned multinational company in Canada may have exposure to U.S. estate tax by virtue of stock options in the U.S. parent company.
This article will provide an update of the recent changes to U.S. estate tax, and will provide a refresher of the impact of U.S. estate tax to wealthy Canadian residents who die owning certain U.S. property.
U.S. estate tax is a tax levied on the value of an estate at death. All U.S. citizens and individuals who are domiciled in the U.S. at the time of death are subject to U.S. estate tax based on the value of their worldwide estate at the date of death. Non-U.S. citizens and individuals who are not domiciled in the U.S. at the time of death are subject to such tax on the value of their U.S. assets as of the date of death. A statutory exemption is allowed for estates below a certain threshold. This exemption limit is different for U.S. citizens than for U.S. non-residents. In this article, it is assumed that a Canadian is a resident of Canada for income tax purposes, and is not a U.S. citizen nor domiciled in the U.S.
Since 2001, the U.S. transfer tax regime, which not only includes U.S. estate tax, but two corresponding taxes, gift taxes and generation skipping taxes, has been in a state of flux. During the 8 years following 2001, estate tax exemption limits were raised, and the rate of estate tax applicable to the largest estates was lowered. However, the legislation that brought in those changes had a sunset clause that required the transfer taxes to be returned to their 2001 levels in 2011, unless subsequent legislation was passed before 2011. On December 17, 2010, President Obama signed into law the Tax Relief Unemployment Insurance Authorization and Job Creation Act of 2010. This law made significant changes to the estate, gift and generation skipping taxes, and set U.S. estate tax exemption limits and rates for the 2010, 2011 and 2012 tax years. Without further changes, U.S. transfer taxes in 2013 will again change, and the 2001 limits and rates will apply for estate tax calculations.
Chart 1 below shows, for U.S. citizens, the effective exemption limit and the top rate of U.S. estate tax. U.S. estate tax is a graduated tax, as is shown in Chart 2.
Chart 1
For 2011 and 2012, the graduated estate tax rates and the unified credit (explained below) are as follows:
Chart 2
Special considerations for 2010
The 2001 changes referenced above included the repeal of estate tax for the 2010 year, prior to reinstating estate tax at 2001 limits for 2011. However, the December 2010 legislation gave the estates of individuals who died in 2010 the choice to use the rules that apply for 2011 and 2012, or to choose the rules that applied in 2010 under the 2001 law. Although the 2001 law repealed estate tax for 2010, there is a cost to choosing the 2001 law because beneficiaries would receive assets from the estate at a modified carry-over basis for income tax purposes, rather than at fair market value. For a Canadian decedent with U.S. estate tax exposure, the decision to opt for applying the estate tax instead of the modified carryover basis rules may involve detailed and complex analysis. If you are responsible for an estate that resulted from a death that arose in 2010, please discuss your choices with your BDO advisor.
U.S. estate tax calculations for Canadians
Although the preceding charts show amounts for U.S. citizens, they are also relevant for Canadians. The exemption amount referred to on page 4 is expressed in terms of a credit against estate tax (the unified credit), or is expressed in terms of the gross dollar value of the estate that the unified credit covers. For example, when U.S. citizens are eligible for an exemption of $5,000,000, as they are in 2011, they can claim a unified credit of up to $1,730,800. Individuals who are not U.S. citizens and who are not domiciled in the U.S. are entitled to a unified credit for U.S. estate tax of $13,000, which represents estate tax on the first $60,000 of U.S. estate value. The $60,000 exemption is a statutory amount in U.S. law, but the Canada-U.S. Income Tax Treaty (the Treaty) can provide a higher amount as it provides for a basic unified credit exemption similar to that available to U.S. citizens. To determine the exemption amount under the Treaty, the exemption amount allowed to U.S. citizens is prorated based on the ratio of the value of U.S. situs assets in the estate compared with the value of the estate of the deceased Canadian as a whole. Where the prorated exemption is less than $60,000 U.S., the estate of the deceased can make use of the flat $60,000 U.S. exemption. The Treaty provides additional relief to Canadians by allowing a non-refundable marital credit in connection with transfers to the surviving spouse.
Canada does not have an estate tax, but it does have taxes that arise as a result of death. When a Canadian taxpayer dies, he or she is deemed to dispose of his or her capital assets for proceeds equal to the fair market value of the assets at the date of death. Therefore, Canadians who die owning U.S. property that is subject to estate tax may also be liable for Canadian tax as a result of this deemed disposition. The Treaty provides relief in that the U.S. estate tax may be eligible as a credit against Canadian income tax in the year of death on U.S. source income.
See the BDO tax bulletin publication “U.S. Estate Tax Issues for Canadians” for further information about U.S. estate tax concerns or consult your BDO advisor with your questions about how these rules could apply in your situation.
Next section: CRA's New Forms - Declaration of Eligibility for Benefits Under a Tax Treaty for a Non-Resident Taxpayer
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