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So, we get this question a lot in our Palm Springs law office. There is no one-size-fits all on this issue. Here’s an overview of many of the most popular methods for Canadians to minimize the estate tax. If you want to get into specifics, call our office at (760) 320-7421.

Non-Recourse Mortgage

What is it? A non-recourse mortgage is a mortgage secured by the house, with no personal liability for the borrower.

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Recall that the US imposes its estate tax on the value of property anybody (US citizen or not) owns in the US (the 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));

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As 2012 draws nearer to a close, we should all keep in mind that the opportunity for maximum estate and tax planning may also be drawing to a close. What are we talking about? Let’s look at the estate and gift tax changes which are scheduled to change at the end of 2012:

1) The $5,000,000 lifetime estate and gift tax exemption amount (actually $5,120,000) in 2012 is scheduled to revert to $1,000,000 in 2013.

2) The highest estate tax rate is 35% in 2012, which is scheduled to revert to 55% in 2013.

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So we’re on to Part 2 on this topic. Here, we’re talking about a US citizen who owns a California home (maybe in Palm Springs), but lives in Illinois.

Presumptions Generally

Let’s review the FTB’s presumptions on time spent in California. If you spend more than 9 months (in a calendar year) in California- you are presumed to be a California resident that year (but you can rebut it by going to the checklist). You can find this presumption in Cal Rev. & Tax Code §17016. There is also a lesser presumption (found in regulations as opposed to the Cal Rev and Tax Code) which provides if you are present in California less than 6 months a year, you are presumed to not be a California resident. This “lesser” presumption is found at 18 Cal. Code of Regs. §17014(b). I consdier it a lesser presumption since it comes from the Cal tax regs and not the Code (unlike the 9 month presumption). There is no presumption if you are present in California between 6 months and 9 months. But in all events, you still must go back and review the checklist.

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So we’re on to Part 2 on this topic. Here, we’re talking about a Canadian citizen who owns a California home (let’s say in La Quinta for example), and the likelihood that person is deemed in a California resident for tax purposes. Again, in fairness, it’s going to be highly unlikely the FTB (the California Franchise Tax Board…basically the IRS for the State of California) deems a Canadian citizen a California resident in a given year, because most Canadians are here on a B-2 Visa (they may not even be aware of this fact), where they simply show the US officials at the border their passport and they’re permitted entry in the US. Under the standard B-2 tourist Visa, the Canadian citizen is only legally permitted to stay in the US up to 6 months in a calendar year. Unless the Canadian citizen is violating the terms of the B-2 Visa (not a good idea, it could be hard to get into the US the next time), or is in the US on a visa other than a B-2 where the Canadian is permitted to stay in the US more than 6 months (like a work related visa), or the Canadian is a dual Canadian-US citizen or has a US green card (permitting the Canadian citizen to stay the entire year in the US if he or she likes), it’s difficult for the Canadian (in California less than 6 months) to be deemed a California resident. But not impossible. We must re-review the checklist of items the FTB looks at from Part 1 of this topic (e.g., location of your spouse/RDP and children; location of your principal residence; where your vehicles are registered; where you maintain your professional licenses, etc.). The FTB may still deem the Canadian a California resident if they have enough checks in the wrong category, even though the Canadian does not spend more than 6 months a year in California.

Presumption Generally

Let’s review the FTB’s presumption on time spent in California. If you spend more than 9 months (in a calendar year) in California- you are presumed to be a California resident that year (but you can rebut it by going to the checklist).

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It’s going to be harder for most Canadian snowbirds visiting California to be deemed California residents than it is Americans from other states to be deemed California residents, but it’s not impossible. The biggest reason for this is most Canadian snowbirds are in California (and the US) on a B-2 tourist visa, which means the Canadian snowbird (unlike other Americans) cannot be in California longer than 6 months in a calendar year (without violating their visa). Also, as the Canadian snowbird reviews the checklist below, it appears less likely (although not impossible) somebody who lives permanently in Canada could have too many negative checks on the checklist. On the other hand, the test for California residency is in some ways more dangerous to the Canadian snowbird than the test for US residency. Why? Because if the Canadian snowbird fails the test for US residency in a given year (we’ve discussed the test in prior blog entries), they could still fall back on the US-Canada Tax Treaty, which contains tie-breaker provisions between the two countries- which would probably lead to the determination that the Canadian who failed the US residency test (i.e., was in the US too much in a given year) was still a resident of Canada (and not the US) in a given year. California has no treaty with Canada (no US state does). So there isn’t any treaty to save the day for the Canadian who is deemed by the State of California to be a California resident in a given year.

The rest of the analysis for the Canadian snowbird is the same as it is for Americans from other states visiting California…

General Rules on California State Taxes

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We next start a detailed series on the consequences of, and how to avoid, being deemed a California state resident for state income tax purposes. We will track this discussion on our Canadian Snowbird blog.

General Rules on California State Taxes

Let’s start with some general principles of California state taxation:

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As a California property owner, you have the right to appeal the amount of your property taxes. You can use an attorney to represent you in your appeal, or you can do it yourself. Property taxes are assessed (and appealed) on a county-wide basis in California, so for those of us in Riverside, Banning/Beaumont and the Coachella Valley (Palm Springs, Rancho Mirage, Palm Desert, Indian Wells, etc.), our appeals are handled in Riverside County.

Am I really Challenging The Amount of My Taxes?

Actually no, what you are really challenging is the Riverside County Assessor’s enrolled value of your property.

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We’ve written before about Canadians being subject to the US estate tax. We know that a Canadian (or any non-US domiciled (also not a US citizen) individual) can be subject to the US estate tax on the value of some of their US property when they die. What property are we talking about? Mainly the value of their US house(s)/ real estate, and furnishings in the house(s), and (and this is important)- the value of their US securities (stock of US companies). US securities count no matter where the Canadian holds the stocks, but there is an exception for the US securities held by a Canadian mutual fund (but note, there is no exception for securities held by the RRSP of a Canadian…the value of US securities held in those count).

How Much May a Canadian Exempt From the US Estate Tax?

Recall that this year US citizens/or residents can exempt $5M from their US estate tax computation (that’s a good deal for Americans, but on other hand they are subject to the US estate tax on the value of their assets held anywhere in the world, not just their US assets). But next year, as presently scheduled, US citizens may only exempt the first $1M from the estate tax (yikes).

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This is the third (and last) part in this series. We see a lot of Canadians here in the Palm Springs/ Palm Desert area/ Coachella Valley area who are interested in not just vacationing here, but in purchasing property which they will then rent out. This series has been about the best way to own California property which will be rented out, with the goal of minimizing any damage from a tenant who likes to sue landlords. While this series has been directed towards Canadians purchasing local property, everything we’ve written in this series (with the exception of the discussion about LLCs and why they don’t currently work for Canadians) applies to people from any country, and for that matter much of it applies to Americans wanting to purchase and rent out California property as well.

We’ve concluded that the limited partnership is likely the best structure (for now) for the Canadian looking to purchase and then rent out Palm Springs/ Palm Desert area/ Coachella Valley property. Let’s look at a few more questions and answers on this topic.

Why Don’t I Just Use a Corporation to Buy the Property, But Instead of My Corporation Selling the Property with the High Tax Rate, I’ll Sell My Corporation’ Stock (with the Property in it) at the Low Tax Rate?