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Personal Income Tax -> US Estate Tax

US Estate Tax May be Payable by Canadians

All amounts in this article are in US dollars
Canada-U.S. Tax Treaty Article XXIX B Taxes Imposed by Reason of Death

A U.S. federal 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 US in fair market value at the time of 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.  If your total worldwide estate in 2016 is less than $5.45 million US ( $5.43 million for 2015) at the time of death (see below for what is included), you will probably not have to pay any US estate tax.  If the estate is passing to a spouse, a marital credit may also be available to reduce the tax payable.

For 2010 to 2012, with the passing of the US bill H.R.4853 -- Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (pdf), the highest tax rate on estates was 35%, and no U.S. estate tax was payable in 2010 to 2012 if the total worldwide estate was $5 million or less, indexed for inflation after 2010.

With the passing of the American Taxpayer Relief Act of 2012 in January 2013, the estate tax on the taxable portion of the estate, if any, is 40%.  The exemption of $5 million for 2011 was made permanent, and is indexed for inflation, resulting in an exemption of $5.45 million in 2016.  See S. 2010 of the Internal Revenue Code.  However, the exemption is prorated for Canadians, based on the value of their US assets compared to worldwide assets.

The total worldwide estate includes:

bullet proceeds of insurance on the deceased's life, generally including proceeds receivable by beneficiaries other than the estate
bullet 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
bullet property the deceased and a surviving spouse owned as community property
bullet several kinds of transfers the deceased made before death
bullet certain annuities to surviving beneficiaries
bullet 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 the fair market value of their U.S. assets at the time of death, including:

bullet American real estate
bullet tangible personal property in the U.S. (furniture, cars, boats, etc.)
bullet 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
bullet certain debt obligations within the U.S.

U.S. stocks are not always subject to U.S. estate tax:  Canada - U.S. Tax Treaty

Canadians are protected by Article XXIX B (8) of the Canada - U.S. Tax Treaty which provides 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 US, the U.S. will only impose estate tax on property for which, on disposal by the owner, any gain would have been subject to income taxation by the U.S.  This includes:

bullet American real estate
bullet 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 US.

Are exchange-traded funds (ETFs) and American Depositary Receipts (ADRs) subject to US estate tax?

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".

IRS ruling letter 200243031 (pdf) indicates that American Depositary Receipts (ADRs) would not be subject to US estate tax when held by a non-resident of the US.

It appears that US ETFs trading on a US exchange would be considered US-situated assets, but Canadian ETFs holding US stocks would not be considered US-situated assets.  At this point, we're not sure if this is only applicable to US ETFs holding US stocks, or would also apply to US ETFs holding foreign stocks.

Are US stocks in RRSPs subject to US estate tax?

When US stocks are held in an RRSP, RRIF, or other non-registered account which is considered a trust, they will be considered US-situated assets, and subject to US estate tax.  However, a Canadian mutual fund which holds US stocks may not be considered US-situated assets.  See the following excerpt from IRS Chief Counsel memorandum 201003013 (pdf) released January 22, 2010:

If the Canadian mutual funds held by Decedentís RRSP are classified as corporations for U.S. tax purposes, the shares of the mutual funds would not constitute U.S. situs property under ß 2104(a) and would not be includible in Decedentís U.S. gross estate.  (The underlying assets also would be excluded from Decedentís U.S. gross estate.)  You indicated that the RRSP held shares in several mutual funds that are organized as  trusts. However, a mutual fund may have been formed as a ďtrustĒ under Canadian law, but be properly classified as a corporation under U.S. law. Based on the information provided, it appears that all the Canadian mutual funds held by Decedentís RRSP would be classified as corporations for U.S. tax purposes.

We have not been able to confirm if all Canadian mutual funds are excluded from US-situated assets.  The above information referred to mutual funds held in one particular Decedent's RRSP.  However, sources such as Sun Life Financial and CPA firm BDO Canada indicate that this applies to all Canadian mutual funds.

Are US stocks held in a Canadian corporation subject to US estate tax?

When US stocks are held in a Canadian corporation, they are considered property of the corporation, not personal property, so would not be subject to estate tax on the death of the shareholder.

How is the US federal 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 $2,117,800 for 2015, which is equal to the tax on a $5.43 million estate.  The unified credit available to Canadians is prorated based on the ratio of U.S. assets to the total worldwide estate.  Example:

bullet $1,200,000 of U.S. assets
bullet total estate valued at $6 million
bullet unified credit for 2016 = 2,125,800 x 1,200,000/6,000,000 = $425,160, which is deducted from the gross estate tax calculated based on the following table:

All amounts are in US$.

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%
500,000 750,000 155,800 37%
750,000 1,000,000 248,300 39%
1,000,000   345,800 40%

The above tax rates are from Internal Revenue Code S. 2001.

For the above estate example, the tax on U.S. assets of $1,200,000, when the total estate is $6,000,000, would be:

Tax on first $1,000,000 $345,800
Tax on next $200,000 at 40% 80,000
Gross estate tax $425,800
Less prorated unified credit:
1,200,000/6,000,000 x 2,125,800  


(425,160)
Net estate tax $640

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 2016, depending on the size of the entire estate, and the amount of the U.S. assets.  All amounts are in US$.

Total
Estate
U.S.
Assets
Gross
Estate
Tax
Prorated
Unified
Credit
Net U.S.
Estate
Tax
$5,000,000 $300,000 $87,800 $127,548 nil
5,500,000 500,000 155,800 193,255 nil
5,500,000 600,000 192,800 231,905 nil
6,000,000 700,000 229,800 248,010 nil
6,000,000 800,000 267,800 283,440 nil
7,000,000 1,000,000 345,800 303,686 42,114
7,000,000 1,200,000 425,800 364,423 61,377
10,000,000 2,000,000 745,800 425,160 320,640

Use our US Estate Tax Calculator to estimate your possible tax.

The "basic exclusion", or exemption amounts and unified credit amounts for 2011 to 2016 are:

Year Basic
Exclusion
Unified
Credit
2016 5,450,000 2,125,800
2015 5,430,000 2,117,800
2014 5,340,000 2,081,800
2013 5,250,000 2,045,800
2012 5,120,000 1,772,800
2011 5,000,000 1,730,800

The unified credit is equal to the gross estate tax that would be paid on an estate with a value equal to the basic exclusion.

Resources

US Estate Tax Calculator

Some Nonresidents with U.S. Assets Must File Estate Tax Returns - Internal Revenue Service (IRS)

Tax Treaty Between Canada and the U.S. - Department of Finance Canada

Form 706-NA US Estate (and Generation-Skipping Transfer) Tax Return (pdf, from IRS) for estate of nonresident who is not a citizen of the US, and Instructions for Form 706-NA.

 

Tax Tip:  This is complicated, so get professional advice if you plan to own more than $60,000 of US assets when you die.

 

Revised: January 23, 2016

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