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…..
Is there an exception (to the requirement of having to pay tax in Canada on the appreciation in the property upon transfer of the US house to the California trust) which allows the Canadian to avoid having to pay tax in Canada?
The answer is yes, a big exception. If the settlor is at least 65 years there is a chance this California trust might qualify as an “alter ego trust” under Canadian law, which would mean there would be no tax upon transferring the appreciated house to the trust.
The bottom line, even in a highly appreciating local market, Canadians should consider using the US revocable trust as a viable method for to avoid probate (and not pay tax in either country upon contribution to the trust). As home values haven’t risen significantly in the Palm Springs area, this has been mostly a “non-issue.” for the last few years.
Call us at Sanger and Manes to discuss this technical area further- 760-320-7421.