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I’m the Executor of the Estate of a Canadian Citizen who Died Owning a Palm Desert California House (or a House Owned Anywhere in the US), And I Need to File A US Estate Tax Return (and Claim the Protection of the US-Canada Tax Treaty). What do I do?

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).

As a general rule, non-US citizen/residents may only exempt $60,000 from the estate tax. So a Canadian who dies with a $250,000 house in the US is potentially subject to an estate tax based (generally) on the value of $190,000 in assets ($250,000 – $60,000). That could lead to the Canadian owing maybe $50,000 or so in the US estate tax. The estate of the deceased Canadian won’t like that. That’s why the executor must invoke the protection of the US-Canada Tax Treaty.

Remember, the US/Canada Tax Treaty Offers Relief, But the Executor Must Invoke the Treaty Relief…It’s Not Given Automatically

Recall that the US-Canada Tax Treaty offers relief so that the estate of the deceased Canadian may not have to pay any US estate tax. Recall that the estate of a deceased Canadian may invoke Article XXIX(B)(2)(a) of the Treaty, which says the deceased Canadian may exclude an amount from the US estate tax based on the following formula: $5M (the US exclusion amount, at least for the rest of 2012) x (the value of Canadian decedent’s US assets ($250,000 in this example) / the value of the Canadian decedent’s worldwide assets (let’s say $1M for this example)). So, its $5M x ($250,000/ $1M)= $1.25M the Canadian may exempt. So this amount the Canadian may exempt (1.25M in US assets) is well above the $250,000 in US assets the Canadian decedent died with, so there easily will be no US tax owed here, AS LONG AS THE EXECUTOR INVOKES THE TREATY!!!

How To Invoke the Treaty

The executor must oversee the completion of the IRS Form 706-NA. This is the US estate tax form which must be filled out for executors of non-US citizen residents who die with US assets. But, and here’s the key part, the executor must also ensure that attached to the back of the From 706-NA is an IRS Form 8833. This is the IRS form which must be completed to take a treaty position (any treaty position, so it’s a good form to get to know). Filing out the IRS Form 706-NA without the Form 8833 could lead (needlessly) to the estate of the Canadian paying $50,000 in US estate tax, when they didn’t need to pay a dime. But the executor must actively invoke the treaty by having the Form 8833 completed and attached to the back of the 706-NA!!! The treaty protection does not come automatically.