Most people living north of the 49th Parallel have heard of the aggressive U.S. Internal Revenue Service campaign aimed at forcing American citizens and dual nationals living in Canada to file U.S. tax returns.
But Canadians are generally unaware that the newly hard-line IRS may be looking for them, too – and if not now, soon.
The estate tax laws in the U.S. may apply to Canadians who are not U.S. citizens or residents. If you own U.S. securities or real estate, it’s probably time to seek the help of an experienced professional to update your financial and estate plans.
“In 2011, if you own assets worth more than $60,000 at the time of death, and your worldwide estate is greater than $5 million, your estate may be subject to U.S. tax,” says chartered accountant Abby Kassar, senior manager, High Net Worth Planning Services, RBC Wealth Management.
By 2013, the exemption amount will be reduced from $5 million to $1 million, she says. [All figures are in U.S. dollars.]“Individuals who are not exposed in 2011 may be in 2013 unless they take steps to keep their liability to a minimum.”
It’s equally important to update your financial and estate plans when an inheriting family member moves to the U.S. or abroad.
“Many parents, with the best of intentions, create their estate plan based on Canadian laws,” says Ms. Kassar.
“If all children are treated equally in the will and one is a resident of the U.S., the results may not be as advantageous for the U.S. resident.”
For example, in Canada, a testamentary trust is an effective vehicle for families wishing to maximize the benefit of income-splitting. That isn’t the case for U.S. residents, however. “The IRS imposes strict rules on beneficiaries of foreign trusts,” she cautions.
As estate plans are often put into place long before an adult child decides to move out of the country, it’s an easy trap to fall into. “Parents neglect to update their wills, and by the time the will comes into play, it’s too late to take advantage of planning opportunities or minimize any negative impact.”
Business owners and their families may also be affected by cross-border planning mishaps, Ms. Kassar says, unless they plan proactively to avoid them. “When Canadians who are also U.S. residents, or Canadian residents who are U.S. citizens, receive shares of private Canadian corporations as part of an estate or asset transfer, they too may find themselves caught by U.S. rules,” she explains. “Many American citizens who have taken up residency in Canada and have been here for many years start their own businesses or set up corporations, but they’re unaware of implications this has on their U.S. tax filing.”
It’s essential that individuals with U.S. citizenship, investments or heirs take steps to ensure they are minimizing their exposure to U.S. tax, says Ms. Kassar. “It’s an ongoing process.”