Cold realities of southern estate tax

National Post


I have been travelling the country speaking to investors, and from Victoria to Halifax, the issue they all want to talk about is purchasing property in the United States.

Canadians are taking the plunge for that bargain dream home in Florida or Arizona. But buyer beware, especially when it comes to estate taxes.

In Canada, upon death, there is a deemed disposition of all your property at fair market value. Any capital gains tax resulting from accrued appreciation (from the date of purchase to the date of death) is payable on your final return.

Not so in the U. S. Instead, citizens are taxed on the fair market value of all property owned on the date of death under the "estate tax" regime.

Think you're home free since you're not a U. S. citizen? U. S. estate tax also applies to non-U. S. citizens who own "U. S. situs property" upon death.

What's considered U. S. situs property? The most common are U. S. real estate, stocks in U. S. companies and U. S. business assets. Estate tax rates begin relatively low (18%), but quickly rise to a high of 45% (above US$1.5-million).

There is an exemption available for the first US$2-million of your estate, but it is only available to U. S. citizens. Canadian residents who are not U. S. citizens are entitled to a pro-rated credit under the Canada-U. S. tax treaty (equal to the US$2-million exemption multi-plied by the ratio of U. S. situs property to your worldwide estate). Thus, if your worldwide estate, including your principal residence, is under US$2-million, you don't need to worry.

What if your estate is worth more than US$2-million? You need some advance planning.

One strategy is to purchase life insurance to cover any tax liability upon death. Keep in mind that the value of such life insurance will be included in the value of your estate.

Another solution is "non-recourse" debt, which can reduce the value of the property for U. S. estate tax purposes. This is a mortgage in which the lender only has the ability to collect amounts owing from the sale of the property, as opposed to the general assets of the borrower. Given recent events, such debt may be hard to find.

Years ago, U. S. real estate was often purchased through a Canadian corporation to avoid U. S. taxes, but Canada Revenue Agency changes now impose a taxable benefit upon the corporation's owner, making this strategy less worthwhile.

Many tax professionals are recommending trusts. Be sure to get expert advice.