Articles Posted in Canadian Snowbird Issues

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Executors probating Canadian estates that include US real estate or other assets subject to the US estate tax system, need to know how the US-Canada Tax Treaty may work to their benefit.  Just as important, they have to understand how to timely “invoke” the treaty, so that the tax benefits they are entitled to accrue to the Canadian estate and aren’t lost.

What US Assets Are Subject To US Estate Tax?

Not all US assets owned by a Canadian or other foreign nationals are subject to the US estate tax system. Mainly, the value of their US vacation home or other real estate, and the value of their US securities (stock of US companies) are included in calculating any US estate tax. 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. Unfortunately, there is no exception for securities held by a Registered Retirement Savings Plan of a Canadian. The value of US securities held by a RRSP count in determining the US estate tax obligation of a Canadian decedent.

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One of the perennial questions my Canadian clients ask me is how they should take title to their US real estate, usually a vacation home.  My answer is, it depends on a number of considerations, but the right choice probably involves a revocable trust specially drafted to hold US real estate.  But in any case, some thought has to go into the decision.  Thousands of dollars may be at stake if the wrong method of title is used.  The choice shouldn’t be made casually while signing escrow papers, which regrettably often happens.

The best way for Canadians, and foreign nationals in general, to hold US real estate depends on their plans for the property, its value, the owner’s age and net worth, whether the property has appreciated since it was purchased, the expectation of rental income, and what issues loom large for the owner (avoiding probate, escaping the US estate tax, selling the property with a minimum of capital gain, limiting personal liability).  Let me go over the basics.

  1. The Probate Issue.  A probate in Canada can’t transfer real property located in the US to the decedent’s heirs.  Neither a California court nor the local county recorder will recognize foreign court orders when it comes to US real estate.  So, if you are a Canadian and you own a vacation home in California in your individual name (or both the names of you and your spouse), when one of you dies you will have to probate the real property (the exception is property held in joint tenancy, discussed below).  Another probate will be required when the surviving spouse dies if the spouse hasn’t sold the property.  Probate is the process whereby a court oversees and orders the transfer of assets from a decedent to the decedent’s heirs.  Like any court process it tends to be time consuming, public, and involves significant attorney’s fees.  Most foreign nationals are wise to try to avoid it.
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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