Canada-U.S. Tax Treaty Article XXIX B Taxes Imposed by
Reason of Death
A U.S. estate tax return must be filed if a deceased
Canadian resident who is not an American citizen owned U.S.-situated assets
exceeding $60,000 fair market
value at death. However, if
the deceased made substantial lifetime gifts of U.S. property, a U.S. estate
tax return may be required even if the U.S. assets do not exceed
$60,000 at the time of death.
proceeds of insurance on the deceased's life, generally
including proceeds receivable by beneficiaries other than the estate
full value of property the deceased owned at the time of
death as a joint tenant with right of survivorship, unless the surviving
spouse is a U.S. citizen, in which case only half of the value is included
property the deceased and a surviving spouse owned as
community property
several kinds of transfers the deceased made before death
certain annuities to surviving beneficiaries
property in which the deceased either held a general
power of appointment at the time of death, or used or released this power in
certain ways before death
The deceased is subject
to U.S. estate taxation on their U.S. assets, including:
American real estate
tangible personal property in the U.S. (furniture, cars,
boats, etc.)
stock of corporations organized in or under U.S. law, no
matter where the stock certificates are physically located, even if they are registered in the name of a nominee (in street
name)
The U.S.
Internal Revenue Code s. 2104 states that "shares of stock
owned and held by a nonresident not a citizen of the United States
shall be deemed property within the United States only if issued by a
domestic corporation". The IRS was not able to confirm for
us whether Exchange-Traded Funds (ETFs)
or American Depositary Receipts (ADRs) which
invest in foreign corporations would be included as "issued by a
domestic corporation".
certain debt obligations within the U.S.
How is the estate tax calculated?
The tax on the estate is calculated based on the table below,
and then the unified credit amount is deducted to arrive at the estate tax
payable. There may be deductions to arrive at the estate amount, and other
tax credits in the calculation, but we are presenting the simplified version
here.
The unified credit amount for U.S. residents is $1,730,800 for 2010, which exempts the tax on a $5
million estate. The unified credit available to Canadians is prorated based
on the ratio of U.S. assets to the total worldwide estate. Example:
$600,000 of U.S. assets
total estate valued at $6 million
unified credit for 2010 = 1,730,800 x 600,000/6,000,000 =
$173,080, which is deducted from the gross estate tax calculated based on the
following table:
A
B
C
D
Taxable estate
Tax on amount
in column A
Tax rate on
excess over amount
in column A
over
up to
-
10,000
-
18%
10,000
20,000
1,800
20%
20,000
40,000
3,800
22%
40,000
60,000
8,200
24%
60,000
80,000
13,000
26%
80,000
100,000
18,200
28%
100,000
150,000
23,800
30%
150,000
250,000
38,800
32%
250,000
500,000
70,800
34%
500,000
155,800
35%
For the above estate example, the tax on U.S.
assets of $600,000, when the total estate is $6,000,000, would be:
Tax on first $500,000
$155,800
Tax on next $100,000 at 35%
35,000
Gross estate tax
190,800
Less prorated unified credit:
600,000/6,000,000 x 1,730,800
(173,080)
Net estate tax
$17,720
If the estate is passing to a spouse, a marital credit may
also be available to reduce the tax payable to zero.
This table shows some examples of net U.S. estate tax
amounts for 2010, depending on the size of the entire estate, and the amount
of the U.S. assets.
Total
Estate
U.S.
Assets
Gross
Estate
Tax
Prorated
Unified
Credit
Net U.S.
Estate
Tax
$5,000,000
$300,000
$87,800
$103,848
nil
5,500,000
500,000
155,800
157,345
nil
5,500,000
600,000
190,800
188,815
$1,985
6,000,000
700,000
225,800
201,927
23,873
6,000,000
800,000
260,800
230,773
30,027
7,000,000
1,000,000
330,800
247,257
83,543
7,000,000
1,200,000
400,800
296,709
104,091
What happens in 2013?
In
2013, unless further legislation is enacted, the estate tax will return to an exempted
estate amount of $1 million U.S., with a top estate tax rate of 55% for
estates up to $10 million. The related unified credit amount would be
$345,800. However, Canadians will still be protected by a part of the
Canada-US Tax Treaty which states that:
If, at the time of death, the entire worldwide estate of a
Canadian resident (other than a U.S. citizen) does not exceed $1.2 million, the U.S. will only impose estate tax on:
American real estate
personal property which is part of the business property
of a permanent establishment or fixed base in the U.S.
This means that shares in U.S. corporations would not be subject
to U.S. estate tax when the entire worldwide estate of the Canadian resident
does not exceed $1.2 million.
The $1.2 million threshold is irrelevant at present, because
estates up to $5 million are exempt for 2010 to 2012.
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