The U.S. estate tax, also known as “death tax,” is imposed on the assets of Americans who pass away. But at a time when the novel coronavirus has led to increased attention to estate planning, snowbirds and other Canadians should remember that the U.S. death tax applies to all people who own properties in the United States.
For U.S. citizens and permanent residents, the estate tax applies to their worldwide assets. For Canadians with no U.S. status, their U.S. real estate, both for personal use and rental, and other U.S. holdings, such as shares of Microsoft Corp. or Apple Inc., are subject to the estate tax, with the following exceptions.
In 2017, the estate exemption threshold was US$5,490,000. That means any person with a worldwide estate valued less than that amount would not have to pay any U.S. estate tax.
U.S. President Donald Trump changed that with his Tax Cuts and Jobs Act of 2017. The new law more than doubled the exemption amount for those dying in 2018 to US$11,180,000, and indexed it to inflation. For 2020, that amount is now US$11,580,000.
For estates valued at more than the exemption threshold, the tax rates on the excess amount are as high as 40 per cent. For a Canadian, this means there would be no U.S. estate tax on any U.S. properties, stocks or other holdings if the total estate is worth less than US$11,580,000.
Although the much higher exception amount means most Canadians will not be subject to U.S. estate tax, there are important changes ahead. As of Jan. 1, 2026, the threshold is set to drop back down to US$5,490,000 (adjusted for inflation), which will likely apply to more snowbirds and other Canadians.
Moreover, changes in the White House or Congress in elections this year, or afterward, could cause the exemption amount to drop well before 2026, and to even lower levels.
In 2016, Hillary Clinton proposed reducing the exemption amount to US$3,500,000, and increasing the top estate tax rate to 65 per cent. Before Bernie Sanders dropped out of this year’s presidential race, he proposed decreasing the exemption amount to US$3,500,000, while increasing the base tax rate from 40 per cent to 45 per cent right away, then progressively up to 77 per cent.
Joe Biden’s proposal is a Canadian-style capital gains tax upon death on any increase in the value of U.S. holdings from the time of purchase, at rates of up to 39 per cent of the gains.
Fortunately, there are estate planning tools you can use to avoid or limit tax.
One potential tool is for Canadians with U.S. holdings to not own real estate, stocks or other instruments in their name, personally.
Say Mr. X, a Canadian citizen and resident, owns a US$500,000 condo in Florida. Mr. X has an estate worth US$7,000,000. If Mr. X dies in 2026, when the exemption amount drops back to US$5,490,000 (adjusted for inflation), there will be estate tax on the condo. At rates of up to 40 per cent, this could be a significant estate tax liability.
However, if Mr. X did not personally own the condo, then his estate could avoid estate tax entirely. This can be achieved in various ways, each with pros and cons that vary depending on the circumstances.
One method is for Mr. X to put the property into a cross border irrevocable trust (CBIT). With a properly drafted trust, Mr. X would not personally own the condo for U.S. tax purposes. When he dies, it would not be subject to estate tax.
Another method is to arrange ownership through corporate or partnership structures. Suppose the condo is owned through Mr. X’s Canadian corporation. His shares in that company, or any Canadian corporation, are not subject to U.S. estate tax.
Canadian tax practitioners also argue that holdings within Canadian partnerships are not U.S. assets for estate tax purposes, although the IRS has not explicitly said so. Choosing the correct ownership structure also depends on the nature of the investment, be it for personal use, rental or a flip.
The appropriate strategy also depends on whether a property is already owned or will be a new purchase. Moving an already-owned property into a new entity would be a disposition of the property in Canada, and subject to Canadian capital gains tax. If the property has significantly increased in value, the capital gains tax due immediately may outweigh the benefit of avoiding U.S. estate tax.
Finally, corporate and partnership ownership structures have further potential tax and reporting obligations.
With the outcome of U.S. elections this fall far from certain, Canadians who own U.S. property and U.S. citizens in Canada should consider setting up estate plans that can weather the unpredictable storms of U.S. tax laws.
David Altro is the managing partner of Altro LLP, which specializes in cross-border tax and estate planning, real estate and corporate matters. Avi Guttman is an Associate Lawyer at Altro LLP.
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