Articles Posted in Canadian Snowbird Issues

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Helped along by the depressed US housing market in the past few years, the Palm Springs, California, area has become a hot spot for Canadians to purchase vacation homes or rental property. Often the same property is used for both purposes: vacations for snow-weary owners, and rentals when they go back to Canada. With the year about to end, it’s a good time to go over the basic tax rules for Canadians who own or rent real property in California.

Assuming the Canadian owner doesn’t have a green card or hold other residency status, the tax implications of owning real estate in the US will depend on how the property is used and how often it’s used.

If the property is solely used as a vacation home – and never rented out during the year – there should be no US tax implications until the house is transferred, either by sale, retitling into a trust or business entity, or at the owner’s death. In our wireless connected world, Canadians who mix vacation with work while at the property need to be careful about running afoul of US federal and California state income tax rules, especially when it comes to the very aggressive California tax authorities and their rules about California source income. But that’s another topic.

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So the California Revocable Trust seems like a very practical ownership form for the Canadian (Great Britain or even the American from a state other than Cal) who wishes to see their heirs spared (and I do mean spared) the California court system, inlcluding the time and cost (probate). Is it true, however, that the contribution of appreciated property can lead to a payment of tax requirement?

Is There a Tax Required in Either Canada or the US Upon Contributing the US House to the California Revocable Trust?

Remember, there’s one of two times the trust will first own the property: either (a) at the inception of the house purchase (for example, Canadians Harriet and Thomas decide to purchase a La Qunita California home, they enter a 30 day escrow period- prior to the closing date, Harriet and Thomas simply inform their escrow agents that they plan to own the house as trustees of their California Revocable Trust- escrow complies, and as of Day 1 the Harriet and Thomas Trust owns the home); or (b) after the home has been owned for a while by Thomas and Harriet, the house is transferred to the trust-. Is there a tax in Canada (or the US) if the trust is deemed owner from Day 1? No, no tax in either country. But what about if Harriet and Thomas have owned the house for years, and then want to transfer it to their California Revocable Trust, does that cause a tax obligation in either Canada or the US? In the US, a transfer of a house owned by H & W to the H&W Revocable Family Trust is not a taxable transaction, so there is no US or California tax. But on their Canadian tax return, Harriet and Thomas have a different conclusion. When Harriet and Thomas transfer their La Quinta house they’ve owned for a few years to their new Cal. Revocable Trust, there very well may be a taxable event in Canada. The tax is based on the appreciation (if any) in the value of the house from when Harriet and Thomas originally bought it until today, the day of transfer to the trust. The appreciation is all speculative, of course, it’s not like there’s been a recent sale to prove there’s been an appreciation in the property. But presumably by reaching out to a local realtor, by checking in with their neighbor (or head of your homeowner’s association), or even by reviewing the recent state property tax bill, they can have a good idea whether the property has appreciated. If it has, they will likely pay a deemed disposition tax on their Canadian tax return, but no tax (or return) will be required in the US upon the transfer to the trust. But, see below for an exception to that rule…..

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More on When We Use the Canadian Irrevocable Trust to Purchase US Property…

So we pick up where we left off last week: super-wealthy Canadians who own more than $5.34M in worldwide assets, and who loathe the idea of paying a US estate tax, should consider (1st and foremost) putting the US house into a Canadian Irrevocable Trust. You can do this with relative ease if the trust owns the house from the inception. But be careful for the scenario where the Canadians own the house individually at first, and then transfer (usually via a sale) the house to a Canadian Irrevocable Trust later. This is thought by some (but by no means all) practitioners to subject to the Canadians to the US gift tax (even though it’s a sale). I’ve yet to see any evidence of this, except for indirect case law from 50 plus years ago, so who knows. Nonetheless, Canadians transferring a US house to a Canadian Irrevocable Trust after owning it individually first (as opposed to when the trust buys the US property first) should remain mindful they are taking a risk, and that IRS may impose a gift tax on this transfer (sale). Call us at Sanger and Manes (760-320-7421) to discuss the Canadian Irrevocable Trust for California (and especially) Coachella Valley properties. This is a highly complex cross-border estate planning area, but Sanger & Manes can help.

For the vast majority of Canadians purchasing US real estate, the biggest concern is not the US estate tax, it’s the excessive cost and time required for a Canadian’s heirs to inherit their parents’ California real estate- i.e. the cost of probate (the California process whereby a California court orders the Canadian snowbird’s US house to be distributed to their designated beneficiary(ies)).

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Us, at Sanger & Manes, lecture on this topic regularly for Canadians in the Palm Springs area. We copy my lecture materials on the question of how the Canadian might consider owning the US home. First, let’s introduce a couple concepts worth considering before we choose the ownership form: the US estate tax and the dreaded California probate. Then we’ll get into evaluating various forms of home ownership.

What is the US Estate Tax? Can it Be Imposed on Canadians?

The US estate tax is a death tax imposed on Americans (on the value of all their assets worldwide) and possibly Canadians, but only if the Canadian owns US property at death (US property generally=US real estate or securities of US corporations). If so, the tax imposed is generally 30-40% of the value of the US property owned at death.

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Summer allows us a little break in our Palm Springs law office, and it also allows us to take a break from our blogs. But as Fall is now upon us (and it is gorgeous outside, trust me), it’s time to get back to business. We get a a lot of questions about the probate process here in California (something our Firm gets involved in regularly), and how it may differ when the deceased was not a US citizen/ resident.

Before We Describe the Probate Process, Remember, Your Estate Will Save Time and Money if You Put Your House in a Trust While You’re Living

California probate is a both time consuming (think 8 months to over a year to complete…) and costly (the family of a deceased will have to pay attorneys approximately 3% of the value of the property being probated in California…plus extra costs as well associated with the estate tax return of the estate and even potentially other costs). On the other hand, property placed into a valid trust (under California law) does not have to go through probate, which generally saves the estate thousands of dollars and speeds up the process by which the heirs receive the property considerably. Sanger and Manes drafts trusts for Canadians owning Palm Springs area real estate (and all of California property generally).

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This blog was written by Attorney Lorraine D”Alessio, who works Of Counsel for Sanger and Manes in Palm Springs, with a focus on immigration issues. She also heads the D’Alessio Law Group based in Los Angeles.

US Immigration for Same-Sex Spouses

On June 26, 2013, the Supreme Court of the United States struck down parts of the Defense of Marriage Act (DOMA), which defined marriage for federal law purposes as between a man and a woman only. President Obama directed federal departments to ensure the decision and its implication for federal benefits for same-sex legally married couples are implemented swiftly and smoothly. Secretary of Homeland Security Janet Napolitano released a statement that effective immediately the U.S. Citizenship and Immigration Services (USCIS) is to review immigration visa petitions filed on behalf of a same-sex spouse in the same manner as those filed on behalf of an opposite-sex spouse. Also, same-sex marriage cases previously denied by USCIS may be reopened.

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…so, let’s first show you the rest of the editorial that ran in the Desert Sun on April 21, 2013, and then we will discuss the latest events concerning the possibility for Canadians to stay in the US more than 6 months a year.

we continue…

Any U.S. immigration reform must include a provision for Canadians

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So let’s walk the Form 8840, and discuss some of the more uncertain questions. Again, we’re focusing on Canadian snowbirds (and not necessarily people from foreign countries other than Canada).

Part 1

Question 1 asks you the following: “Type of U.S. visa (for example, F, J, M, etc.)”. We suggest the Canadian snowbird answer the “B-2 Visa”. We say this even though Canada is a visa exempt country (so theoretically answering “no visa” on Question 1, or “Canadian- no visa” should be fine too. This is the typical visa utilized by a tourist to the United States. This question is a little challenging for the Canadian snowbird, because they generally simply present a passport at the border, and not an official visa. The US and Canada really do have a special relationship, and so typical formalities are not always required for Canadians visiting the US (and Americans visiting Canada). While a Canadian snowbird visiting the US may not need a visa. the proper answer on the Form 8840 is probably citing the B-2 Visa (the tourist visa).

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So, like so many Canadians in the Palm Springs/ Palm Desert area, you’ve determined you probably should fill out the Form 8840. Why? Because you’re in the United States year in, year out, over 4 months but less than 6 months in a calendar year (and if you’re in the Coachella Valley right now, let’s face it, who wouldn’t want to be here as much as possible…save July and August that is). And if you are in the US more than 4 months every (calendar) year, and you don’t fill out the Form 8840, the risk you take is that the IRS will deem you a US tax resident for the taxable year (as they are permitted to do if you are here, year in, year out, over 4 months a calendar year). While that may not be the end of the world (you can always hire a guy like me to get you out of that situation, and it will not lead to a double tax (once in Canada and once in the US)), it will lead to a logistical headache, which you will have to straighten out. So, be safe, complete the Form 8840 if you’re in the US every year between 4 to 6 months, like so many Canadian snowbirds are in this area of California.

When is the Form 8840 Due?

You must complete the Form 8840 by June 15 (the due date of the IRS Form 1040NR) of the year after the year for which you are reporting (so for the 2012 Form 8840, you should send it in by June 15, 2013). You actually have until the due date (June 15) plus extensions, which would be months later (so, yes, you could send in your 2012 Form 8840 in July 2013). But let’s not do that. You want to get the Form 8840 in by June 15 of the year after the year to which the form relates (so for 2012, let’s send them in by June 15, 2013).