Articles Tagged with US-Canada Tax Treaty

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shutterstock_341354720-sm-jpg-300x185-300x185One of the major concerns of Canadians holding US real estate or other assets is whether the property will be subject to the US estate tax when they die.  It’s no small matter.  The estate tax top rate is 40%, and unlike Americans, foreign nationals who own US assets generally only qualify for a paltry $60,000 estate tax exclusion amount, not the $5.5 million unified credit available to American citizens.  Theoretically, if no planning were done and a foreign national died with a US vacation home worth $1 million, his estate would owe about $322,000 in US estate taxes.

Just as important, while American citizens have the benefit of the unlimited marital deduction when they leave their estate to a spouse (which is the typical estate plan), noncitizen couples cannot make use of the marital deduction to reduce or eliminate US estate taxes (unless they establish a QDOT, discussed below).

Fortunately for most Canadians, however, the US-Canada Tax Convention and its protocols, come to the rescue, if they plan right.  Here’s how.

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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.