Canadians who are not U.S. citizens, green card holders or residents, may be surprised to learn that they too may be subject to U.S. estate tax even if they are considered non-resident aliens in the U.S.
U.S. taxpayers are subject to U.S. estate tax (18-40%) of the fair market value of their world-wide assets no matter where they reside if the value of their estate exceeds the current exemption amount (currently $11.58Million USD).
If you own property that is situated in the U.S. (referred to as U.S. situs property), you may not be aware that:
- you could be subject to U.S. estate tax on the fair market value of your U.S. situs property when you pass away and your world-wide estate surpasses the current lifetime gift and estate tax exemption amount ($11.58 Million USD in 2020)
- the executor of your estate will be required to file a U.S. estate tax return for a non-resident alien within 9 months of your passing, if at the time of your death you own property in the U.S. which has a combined value in excess of $60,000 USD.
What is U.S. Situs property?
U.S. situs property includes such things as U.S. real estate, tangible personal property located in the U.S. (furniture, vehicles, boats etc), U.S. business assets, shares and options of U.S. corporations.
How does the U.S. Estate Tax apply?
A unified tax credit is available which exempts the first $60,000 USD of U.S. situs assets from U.S. estate tax. Pursuant to Canada’s tax treaty with the U.S., Canadian residents can claim an additional credit which essentially shelters the Canadian resident from U.S. estate tax if the value of their world-wide estate is less than $11.58 Million USD.
Filing Requirements
If you own U.S. assets with a value that exceeds $60,000 USD, your executor will still be required to file a U.S. estate tax return claiming the benefits under the Canada-US tax treaty even if no tax is owing. This U.S. estate tax return is due nine months after the date of death.
It is important for individuals with significant U.S. situs assets to estimate their world-wide estate to determine if they could be exposed to U.S. estate tax. The world-wide estate includes all of the deceased’s assets including life insurance proceeds and, in many cases, the full value of jointly owned property.
If U.S. estate tax applies, it is especially problematic because the top U.S. estate tax rate is applied to the fair market value of the asset which results in a tax bill that is often greater than the Canadian tax that is payable on death. The capital gains rate in Canada is much lower than the top U.S. estate tax rate and the provinces and territories generally don’t provide a foreign tax credit that can be claimed to recover the U.S. estate tax payable so double tax could apply.
Note: U.S. Exemption is Subject to Change
The estate tax exemption amount was effectively doubled starting in 2018 and is set to revert back to $5 Million USD (plus adjustments for inflation) on January 1, 2026 unless new legislation is introduced. Historically, the U.S. estate tax is a partisan issue and the exemption amount has changed significantly in the past.
Canadians with assets located in the U.S. should be aware of the potential exposure to U.S. estate tax on death. As changes are made in the U.S, it is important to monitor how such changes could impact the tax payable on death. For more information on this topic, speak to your IG Consultant and ask for a copy of our white paper “US Estate Tax: What Canadians should know”.