Canadians purchasing a
residence in the United
States—beware of estate tax
September 2012
Canadian residents who are neither US
citizens nor residents can still be subject
to US estate tax on assets they own in the
United States, including real estate, US
corporation shares, and tangible and
other movable property.
Estate tax
Under the Canada-United States Income Tax
Convention (the Treaty), for 2012, US estate
tax is only applicable to Canadian residents
to the extent that the FMV of their
worldwide assets exceeds US$5.12 million. 1
For 2012, the maximum tax rate applicable is
35%. It’s important to note that even if a
Unlike income tax, estate tax is not
applicable to gains accrued on property, but Canadian estate has a value which is less than
rather on the fair market value (FMV) of the the exemption amount, there may be a
US situs assets. Estate tax paid in the United requirement to file a US Estate Tax Return.
States may entitle a taxpayer to a foreign tax
Basic credit and unified credit
credit for Canadian tax purposes to the
extent that this tax is attributable to property Canadians may deduct the higher of the
following two credits from the amount of
held in the United States. Accordingly, the
foreign tax credit mechanism would only be tax payable:
efficient to reduce the total tax burden if a
1 A basic credit of US$13,000; or
significant capital gain for Canadian tax
purposes had accrued on the US residence at
2 A unified credit prescribed under the
the time of death. US estate tax can,
Treaty and calculated as follows:
therefore, result in a substantial additional
charge that needs to be taken into
FMV of estate property
consideration.
US$1,772,800 X
located in US
FMV of estate’s worldwide
assets
On January 1, 2013, the exemption amount and
maximum rate are scheduled to revert back to
their 2002 levels of $1 million and 55%
respectively.
a
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Example: Mr. Smith, a Canadian resident,
has property in Canada with a FMV of
US$9,000,000. He purchases a residence in
Florida for US$1,000,000. Therefore his
worldwide estate is US$10,000,000. If Mr.
Smith passes away following his purchase, he
will be subject to estate tax even though the
property did not increase in value since its
acquisition. The amount of tax payable will
be calculated as follows:
US$
Estate tax on property with a FMV of
US $1,000,000
330,800
Credit equal to the higher of:
 US$13,000; or
1,000,000 (FMV of
 US$1,772,800 U.S. estate)
×
10,000,000 (FMV
worldwide estate )
Tax payable in the United States
(177,280)
of only 15% plus any state tax. This same
gain would be taxable at a maximum
marginal rate of about 20% to 25% in
Canada. 2 Given that Canada grants a credit
for taxes paid in the United States, the net
total tax on the gain would be equal to the
tax paid in Canada. The same property taxed
in a corporation will result in a higher tax
liability due to the fact that US corporate
rates are higher than the rates in Canada. In
effect, it’s the higher of the two countries’
respective tax rates that is applied.
Therefore, it’s important to properly
consider all circumstances prior to holding a
property through any specific vehicle.
What follows is a summary of the principal
methods of owning US residences.
153,520
Spousal credit
The Treaty also provides for a spousal credit
which increases the exemption amount when
the property is bequeathed to a Canadian
resident spouse. In such circumstances, the
credit offered is doubled. As such, in the
example above, if Mr. Smith bequeaths his
US residence to his spouse, the additional
credit would be US$177,280, such that the
tax upon the death of the first spouse would
be nil.
Before 2005: single-purpose
corporation
Until January 1, 2005, one of the most
commonly used methods for acquiring a
residence in the United States was through
the incorporation of a single-purpose
Canadian corporation. The property was
then purchased and held by that Canadian
corporation. As such, at the time of death,
the individual was not deemed to have
disposed of the property in the United
States. This solution helped avoid the
assessment of US estate tax upon death.
Ownership methods to limit estate
However, as noted above, on the subsequent
tax
resale of the property, the tax rate was much
There are several mechanisms for limiting or higher than if the individual had sold the
avoiding US estate tax. However, in some
residence personally, since the US corporate
cases, limiting the exposure to the US estate tax on the sale is higher than the tax paid in
tax may result in higher income taxes at the Canada.
time of a subsequent sale than if the person
owned the property personally. In fact, a
person who sells a residence that he or she
owned personally for more than a year in the
United States is generally subject to US tax
2
The amount of tax will vary by province.
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For Canadian tax purposes, owning
residential property through a single-purpose
corporation didn’t used to result in any
negative tax consequences for the individual.
However, for 2005 and subsequent years, the
Canada Revenue Agency (CRA) will assess a
taxable benefit where US based real estate is
held in a single purpose corporation. The
value of the benefit will generally be equal to
the fair market rental value of the property,
net of any actual rent paid by the
shareholder, although other valuation
methods have been used by the courts. For
this reason, using a single-purpose
corporation to own US real estate is no
longer advisable. Single purpose
corporations properly structured to acquire
US real estate prior to 2005 continue to be
covered by the CRA’s prior policy.
Other available methods
The principal methods that can currently be
used to limit or defer US estate taxation for
residential property in the United States are:
1. Personal ownership
Life insurance
Owning property personally can result in tax
being payable at the time of death, including
US estate tax. Provided the worldwide estate
value is not too high, it may be possible to
take out life insurance to cover contingent
estate tax.
Qualified domestic trust (QDOT)
If, despite life insurance or a non-recourse
loan, the property’s value is such that the
estate tax will be high, other structures such
as a QDOT may be considered. This is a US
trust that defers payment of tax until the
death of the second spouse.
Joint tenancy
This method is frequently used by Canadian
individuals who acquire property in the
United States. It is generally joint ownership
where each spouse owns 50% of the
property.
However, in the United States, this type of
ownership can cause problems. Upon the
death of one of the spouses, the deceased
spouse could be presumed 100% owner of
the property if the spouses are neither US
residents nor citizens. To refute this
presumption, the estate liquidator must then
prove that the share of the property owned
by the surviving spouse was entirely financed
by his or her own money and not from a
donation from the deceased spouse.
In such circumstances, there is also a risk of
US tax on donations, and therefore,
Canadians are discouraged from using this
method of ownership.
Tenancy in common
This method of ownership is much more
beneficial than joint tenancy. In fact, when
Non-recourse loan
It is also possible, in some cases, to take out the spouses own the property through
a non-recourse loan, where the creditor’s
tenancy in common, the previously
only recourse is the property located in the
described risks do not apply. Therefore,
United States. When such a loan is possible, upon the death of the first spouse, US estate
the estate value is reduced by an amount
tax would only apply to his or her 50% share
equal to the loan, thereby reducing applicable of the property.
estate tax. However, banks are increasingly
reticent to grant such loans.
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This ownership method should be clearly
specified at the time of acquisition, in an
agreement indicating that ownership is in the
form of tenancy in common. The document
evidencing the acquisition is an important
document for this type of ownership.
Conclusion
Acquiring a residence in the United States
can become a headache, but there are many
structures that can help reduce or eliminate
the US estate tax that can result from such
acquisitions. However, before making any
decision, an analysis of each individual’s
situation should be carried out. Many
factors should be taken into consideration,
2. Other ownership methods
Other more sophisticated and more complex including the cost of the residence
structures can be set up to limit or eliminate purchased, the estimated FMV of the
worldwide estate, the purpose of the
US estate tax. One of the more common
acquisition (very long-term investment or
structures is to use a Canadian trust.
subsequent sale) as well as the age of the
investors.
A Canadian discretionary trust can acquire
and own the property. This structure
Do not hesitate to contact your Grant
presents a dual advantage:
Thornton LLP tax adviser who can help
• upon resale, the gain is taxable at tax determine the most appropriate structure
for your needs. Or, visit
rates applicable to individuals; and
www.GrantThornton.ca to find an adviser
• upon the death of one of the trust’s near you.
beneficiaries, US estate tax is
generally not applicable.
3. Younger generation
In some situations, it may be beneficial to
have an adult child or other younger related
party acquire the US personal use property
on the assumption that such family member
will succeed the parent. This in effect can
provide a deferral of US estate tax, or if sold
by the family member prior to their death, an
elimination of the estate tax (in which case,
income tax would be payable on any realized
capital gain). Use of the property amongst
the family is not restricted – in other words,
your child can allow you to use the property.
Care should be taken to ensure that no rent
is being paid for the use of the property as
this would result in US income tax
consequences.
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