Has the thought ever crossed your mind to buy that beautiful property south of the border? Do you already own property in the United States?
There are many factors that come into play when owning U.S. property. Specifically, the U.S. tax system has many different rules than Canada.
One huge difference you must consider is U.S. estate tax and strategies to diminish the large tax bill your estate could incur. The U.S. estate tax discussion below applies to Canadian residents who are not U.S. citizens or green card holders.
U.S. estate tax can arise on the death of an individual. As a Canadian resident, the tax is imposed based on the value of the U.S. property you own. If the value of your U.S. property is greater than US$60,000, your executor is required to file a U.S. estate tax return.
Therefore, you may want to watch when you are reaching US$60,000 in U.S. property. “U.S. property” includes U.S. real estate, shares in publicly traded U.S. corporations, shares in private U.S. corporations, tangible property permanently situated in the U.S., bonds and other debt issued by U.S. corporations and governments.
This limit becomes somewhat of an issue when looking to own real estate in the U.S.
However, there is some relief for Canadian residents under the Canada-U.S. Tax Treaty. If you have worldwide assets valued at less than US$11.58 million on death, even though your estate will be required to file a U.S. estate return, there should be no U.S. estate tax payable on your death. The US$11.58 million exclusion is effectively doubled when all of your U.S. property passes to a surviving spouse.
Some items to consider when calculating your worldwide assets are as follows:
- Your life insurance proceeds at death may be included in this calculation.
- The total value of assets owned in joint tenancy with your spouse may be included (versus 50 percent) .
- The value of properties you retain a life interest in may be included, such as farmland with remainder interest passed to children.
You also must keep an eye on the US$11.58 million exclusion changing. The exclusion is set to decrease in 2025 to US$5.6 million (adjusted for inflation).
There are options to consider to limit your U.S. estate tax as follows:
- Use a non-recourse mortgage if available. This type of debt obligation is only collectible against the U.S. property. These types of mortgages are 100 percent deductible against U.S. property value when determining estate tax.
- Consider having your children own the U.S. property. At minimum this helps skip a generation of tax. There are many considerations with this planning. What if your children go through a divorce?
- Calculate your worldwide assets annually so you know your U.S. estate tax exposure. If you are paying U.S. estate tax, you may consider using life insurance.
- Consider using gifting rules in Canada to lower your worldwide assets. Farmland can be gifted to your children on a tax-deferred basis in Canada or put into a family trust to lower your worldwide assets.
- Consider using a partnership or trust to own the U.S. property. If a trust is used, it should be created prior to the identification of the U.S. real estate to be purchased. This type of planning is complex to implement and professional advice should be obtained before purchasing U.S. property.
While this article briefly touches on the U.S. estate tax and tax strategies, there are many more complex factors that should be considered when purchasing U.S. property. Talk to your adviser to see which strategy will work best for you.
Colin Miller would like to thank Riley Honess and Mackenzie Gal of KPMG for their assistance with writing this article.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: firstname.lastname@example.org.