October 2011 Archives

October 11, 2011
Posted by Michael Brooks

When are Canadians Who Own a Home in Palm Springs Subject to the US Estate Tax?

Many Canadians who own homes in the Coachella Valley (or anywhere in the US) will not be subject to US income tax (other than with respect to their US source income), because they do not spend enough time in the US to be considered a US resident for income tax purposes. We have bloged about this topic in prior posts. But just because a Canadian citizen is not generally subject to US income taxes does not mean that, upon the Canadian citizen's death, their estate will not be subject to US estate tax on their US house and other US property. Let's look at this topic in detail....

When Are Canadians Subject Generally to the US Estate Tax?

As with any non-US citizen/ resident, Canadians are generally subject to US estate tax on their assets located within the US (US "situs property") upon their death. The following types of property constitutes US situs property for the purposes of the US estate tax:

1) All real estate located in the US;
2) Tangible personal property located in the US (these are objects which can be moved touched or felt, such as jewelry, boats and art (which the Canadian citizen might hang in their US home));
3) Shares of stock of a US corporation.

When are Canadians Subject to the US Estate Tax on All Assets they Own Worldwide?

It's one thing to be subject to the US estate tax on your assets located within the US, but under certain scenarios non-US citizens can also be subject to the US estate tax on their worldwide assets! How is this possible? When a foreign citizen is considered "domiciled" in the US, they become subject to the US estate tax on all their worldwide assets. Canadian visitors to the US are unlikely to be considered "domiciled" in the US, as this is a subjective test which requires that the Canadian be in the US with the intent not to return to Canada. Obtaining a US green card, for example, is considered a strong factor in showing an intent not to return to Canada. But the typical Canadian snowbird, down frequently to the US in winter months but with no interest in moving from Canada permanently, will have no concern with having the US estate tax imposed on their worldwide assets (but will, of course, have to prepare for an estate tax on their US situs property).

What Rate of Tax Must Canadians Pay on Their US Estates?

There are many variables to this question. There are several exclusions to discuss, and the US-Canada Treaty plays a significant role. Let's leave the discussion of the numerous variables for future posts, and keep it simple for now. Maximum rates and dollar levels of exclusions (some of which Canadians may be eligible for, to be disscused in future posts) have varied significantly in recently years. In 2011, US citizens my may exclude the first $5 million from their estate tax calculation, and the maximum rate is 35%. So, in simple terms, a US citizen who dies in 2011 with an estate worth $15 million must pay an estate tax of $3,500,000 (15,000,000- $5,000,000 (max exclusion)= 10,000,000; $10,000,000 x 35%= $3,500,000). Note that in 2010, however, the maximum exclusion was only $1,000,000. So the exclusion amounts and maximum rates may change from one year to the next. Again, there are many variables to discuss here, especially as the US estate tax applies to Canadian citizens. We will examine this in more detail in future posts.