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tax matters

I recall watching an episode of The Jeffersons many years ago. George Jefferson was reading his last will and testament on videotape as family and friends gathered around to watch the recording. George was describing what he was leaving behind to each family member and friend. As the group watched and George concluded his bequests, the Jeffersons' housekeeper, Florence, asked: "What about me?" Without missing a beat, the video continued with George saying: "Florence, I bet you're saying: 'What about me?' Well, don't worry, I didn't forget about you. Anybody out there got a quarter?"

George noted that they were an affluent family, which complicated their estate planning. Yet, it doesn't take a large estate to face complexity at the time of death. Simply having a connection to two or more jurisdictions is enough to create problems that will have to be solved.

The problem

More people are finding themselves connected to more than one jurisdiction. Some people are mobile and have worked or lived in more than one country, for example. Others own real estate in more than one country (there are more than just a few snowbirds who fall into this category).

The fact is, tax systems in different jurisdictions can clash and create problems. I want to distinguish between income taxes and estate taxes. The biggest issues arise when another jurisdiction levies taxes on the estate of an individual. These taxes go by different names depending on the country, and are often called estate taxes, inheritance taxes, death taxes or succession duties.

Depending on the country, these estate taxes can apply based on the residence or domicile of an heir or the deceased, the tax residence or citizenship of the deceased, the location of assets, or other factors.

In Canada, we don't have estate taxes; rather, we have income taxes. Upon death. you'll be deemed to have sold most of what you own, which can create income taxes owing on capital gains if certain assets have appreciated in value.

The problem that commonly exists is that you might pay income taxes in Canada at the time of your death, and perhaps estate taxes to another country on the same assets, with no relief for double-taxation, or triple taxation in some cases. Canada's tax treaties with the United States and France provide some relief from double-taxation as a result of estate taxes, but that relief may not be complete, and isn't available in the case of other countries. A double-tax problem can also arise when your heirs are located in other jurisdictions or you inherit assets from another jurisdiction.

The examples

Suppose George Jefferson was resident in Canada and owned land in Britain. At the time of his death, he'd be required to pay an inheritance tax in Britain based on the fair market value of his capital property located there. Further, he'd be deemed to have sold the property at fair market value for Canadian tax purposes, which could give rise to income tax on the capital gain if the property had appreciated in value (I'm assuming he doesn't defer the tax by leaving the property to his wife upon death).

George would not be entitled to relief in Canada for the British inheritance tax paid since our tax law provides relief for income taxes only, not inheritance taxes (there's an exception in the case of the U.S. and France, as noted above).

If the land owned by George had been located in, say, Australia, there would be a different problem. George would pay tax in Canada on the deemed disposition upon his death. In Australia, however, there is no deemed disposition of the property when George dies, so there would be no tax at that time in Australia. There eventually may be tax in Australia when the property is sold by his heirs, but there will not be an ability to offset the Canadian taxes paid against the Australian tax owing since the tax bills arise in different years.

There are other examples where connections abroad can give rise to double- or triple-tax problems. Thanks to Catherine Brown at the University of Calgary for these examples.

The moral

If you're a Canadian resident with property outside of Canada, leaving assets to non-residents, or will be inheriting assets from abroad, or you're a non-resident with property in Canada, or a U.S. citizen living in Canada, you should get some tax advice to avoid paying more tax than necessary.

Tim Cestnick is president of WaterStreet Family Offices, and author of several tax and personal finance books.