Personal Income Tax -> US Federal Estate Tax
US Federal 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
Dec 2020 Update: Biden's tax plan includes increasing the top estate tax rate to 45%, and reducing the exemption amount to $3.5 million (2009 level). See Tax Foundation: Details and Analysis of President Joe Biden's Tax Plan.
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. The United States passed the Tax Cuts and Jobs Act (TCJA) in 2018. This Act amends the basic exclusion to $11.58 million US for 2020. If your total worldwide estate in 2020 is less than $11.58 million US (could be reduced to $3.5 million with Biden tax plan) 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.
The total worldwide estate includes:
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:
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:
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.
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, some of which may be prorated, and other tax credits in the calculation, but we are presenting the simplified version here.
The unified credit amount is calculated as the taxes that would be payable on the basic exclusion amount which is specified in s. 2010(c)(3) of the Internal Revenue Code. The basic exclusion amount, prior to 2018, was $5 million indexed for inflation. The Tax Cuts and Jobs Act increased the $5 million to $10 million indexed for inflation, resulting in a basic exclusion amount of $11.18 million for 2018. The unified credit, or taxes otherwise payable, on this amount is $4,417,800.
The unified credit amount for U.S. residents is $4,417,800 for 2018 ($2,141,800 for 2017), which is equal to the tax on a $11.18 million ($5.49 million for 2017) estate. The unified credit available to Canadians is prorated based on the ratio of U.S. assets to the total worldwide estate. Example (all amounts in US$) for 2018:
All amounts are in US$.
The above tax rates are from Internal Revenue Code S. 2001.
For the above estate example, the tax on U.S. assets of $3,000,000, when the total estate is $12,000,000, would be:
If the estate is passing to a spouse, a marital credit may also be available to reduce the tax payable to zero.
This table shows some examples of net U.S. estate tax amounts for 2019, depending on the size of the entire estate, and the amount of the U.S. assets. All amounts are in US$.
Use our US Estate Tax Calculator to estimate your possible tax.
The "basic exclusion", or exemption amounts and unified credit amounts for 2011 to 2020 are:
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.
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 own more than $60,000 of US assets.
Revised: February 26, 2021
Copyright © 2002 Boat Harbour Investments Ltd. All Rights Reserved. See Reproduction of information from TaxTips.ca