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I’m a Canadian Who Owns a House in Rancho Mirage California, Why Do I Care That the US Estate Tax is Scheduled to Significantly Change Soon?

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));
3) Shares of stock of a US corporation.

So a Canadian is absolutely subject to the US estate tax, imposed on the value of their US situs assets. Note, a Canadian is also subject in Canada to deemed disposition tax on death (where we pretend the decedent sold his or her assets right before death, and the tax is paid on the gain component). The US Canada Tax Treaty provides that the Canadian decedent does not have to pay both a US estate tax and a Canada tax on the deemed disposition, but they’ll have to pay the larger one of the two . In these times of relatively flat growth in the value of US real estate, with respect to the US assets the Canadian is probably more likely looking at the specter of paying the US estate tax (which is just based on value, not growth) , and not the Canadian tax on deemed depositions at death.

How Do We Calculate the US Estate Tax Imposed Upon Canadians in 2012?

In 2012, Americans may exempt $5,000,000 of their assets from the estate tax, and the highest rate of US estate tax is 35%. The US/Canada Tax Treaty permits Canadians to utilize a portion of the $5,000,000 exemption as determined by the following formula:

$5,000,000 x (Value of US Property/ Value of Worldwide Assets)= exemption available
Example:

Jeff the Canadian Snowbird has $10,000,000 in worldwide assets, and purchases a Palm Springs house for $1,000,000. How much US estate tax will Jeff owe if: Jeff dies in 2012?

Answer (generally…not exact):

1st Determine the exemption available:

$5,000,000 (US exemption) x ($1,000,000 (US assets)/$10,000,000(worldwide assets)=

$5,000,000 x 1/10= $500,000 exemption available
$1,000,000 (US assets) – $500,000(exemption available)= $500,000 subject to estate tax
$500,000 x 35% (highest rate of US estate tax in 2012)= $175,000 estate tax owed

What’s going to change in 2013?

The $5,000,000 exemption amount in 2012 is scheduled to revert to $1,000,000 in 2013.
The highest estate tax rate is 35% in 2012, which is scheduled to revert to 55% in 2013.

How does that impact Canadians? Let’s look at the example again for 2013:

Example for 2013:

Jeff the Canadian Snowbird has $10,000,000 in worldwide assets, and purchases a Palm Springs house for $1,000,000. How much US estate tax will Jeff owe if: Jeff dies in 2013?

1st Determine the exemption available:

$1,000,000 (US exemption) x ($1,000,000 (US assets)/$10,000,000(worldwide assets)=

$1,000,000 x 1/10= $100,000 exemption available
$1,000,000 (US assets) – $100,000(exemption available)= $900,000 subject to estate tax
$900,000 x 55% (highest rate of US estate tax in 2013)= $495,000 estate tax owed in 2013!!!

We’ll talk about popular strategies for Canadians to minimize or avoid the estate tax, in the next post.