The Lawyers Weekly - November 11, 2011

Beware U.S. property
tax implications

CATHERINE
EBERL

Lured by balmy weather and a hotter national currency, Canadians have been flocking to the U.S. to shop for vacation properties. Easily overlooked in the swirl of excitement surrounding a purchase, however, are the tax implications of ownership.

The U.S. imposes a federal estate tax on the worldwide estates of all its citizens, as well as U.S. residents. It also imposes an estate tax on non-citizen non-residents who own U.S. situs property, which includes stocks of U.S. corporations, even if the stocks are owned in a Canadian brokerage account, and U.S. real property. If however, the real property is owned by a properly structured residence trust, it will not be subject to U.S. estate tax.

plying the $5 million exemption by a fraction, the numerator of which is the value of the decedent’s U.S. situs property and the denominator of which is the decedent’s worldwide property (including jointly owned property, retirement accounts, beneficial interests in certain types of trusts and possibly even life insurance benefits paid on the decedent’s death). The prorated exemption can be doubled for property passing to a surviving spouse.

For Canadians who are concerned with the estate tax implications of becoming a U.S. property owner, the first step is to determine their potential estate tax liability.

American citizens and residents enjoy a tax credit that shelters the first $5 million of their estate from taxation, but the Internal Revenue Code reduces the exemption to a meager $60,000 for non-citizen non-residents. While the $60,000 may be able to protect a few U.S. stocks from estate tax, it’s a safe assumption that for most snowbirds it will not be enough to shelter an entire vacation home. The federal tax is applied at a maximum rate of 35 per cent (which is subject to future legislative change) and additional state tax may be due, depending on where the property is located.

The U.S.-Canada Income Tax
Treaty increases the exemption for
The diffi-

ARTPUPPY / ISTOCKPHOTO.COM

cultly in determining whether the
purchaser will have enough exemp-
tion is the great unknown of what
the U.S. Congress will do next. The
$5 million exemption is scheduled
to decrease to $1 million on Jan. 1,
2013. Congress may enact legisla-
tion extending or even increasing
the $5 million exemption or they
may allow it to roll back to $1 mil-
lion. Considering that non-citizen
non-residents are only entitled to a
prorated portion of the exemption,
many Canadians who would not
have any estate tax liability when
the exemption is $5 million may
have to pay U.S. estate tax if the
exemption returns to $1 million.
If a purchaser determines
after crunching the
numbers that they
could benefit
from using a
residence
trust, they
should answer these two questions
before any comprehensive plan-
ning takes place: First, if a mort-
gage is required, will the bank allow
the property to be owned in trust?
Second, does the homeowner’s
association, condo board or like
organization allow real property to
be owned in trust? If the answer to
both questions is yes, the purchaser
can proceed with a residence trust.