Moving Out of Canada
US Tax and Estate Tax Considerations
Special estate planning considerations apply when a person, their spouse or their
- Canadian resident/US citizens
- Canadian residents owning certain US property
- Children in the US
Each of these scenarios is briefly explored below. However, due to the complexities of US tax laws, it is important for you to consult with tax professionals who specialize in this area.
Canadian Residents/US Citizens
If you reside in Canada but are a US citizen, you are unfortunately subject to the full weight of both the Canadian and tax systems. This is due to the fact that Canada bases its taxation on residency, and the US on citizenship. You must therefore file annual tax returns in both Canada and the US, and are subject to multitude of other US tax filings to ensure you are properly reporting on investments and other financial holdings held outside the U.S.
As well, you need to be careful in terms of your tax planning. For example, a tax-free savings account (TFSA) is not recognized as a tax-deferred account for US purposes. As a result, income and gains in a TFSA must be reporting annually for US tax purposes.
Fortunately, it is possible in many cases to claim tax credits in the US against taxes paid in Canada. Since taxes payable in Canada are generally higher than in the US, this means no taxes will ultimately be payable in the US.
The US 2017 Tax Cuts and Jobs Act (TCJA) has made several fundamental changes to the tax rules governing both individuals and private corporations, effective in 2018. It is therefore important to review these tax changes with US tax professionals to determine how these changes will impact the combined tax liability in Canada and US.
US estate taxes will also apply to Canadian residents/US citizens based on worldwide assets. The TCJA has also made changes in this area, doubling the tax exemption to US $11.2 million for individuals and US $22.4 million for married couples. While this will effectively exempt most people from US estate taxes, these increased exemptions are only in effect until 2026. This creates great uncertainty for wealthier individuals in terms of planning for US estate taxes.
It is also important to note that a foreign tax credit for US estate taxes may be available in Canada (or in the US to offset US estate taxes) where a capital gain arises in Canada from the deemed disposition of the US assets due to death.
Life insurance should be considered to cover off current and contingent estate tax liabilities should the current exemption not be maintained in the future. However, proper structuring is required to ensure that the death benefit does not increase the deceased’s assets subject to US estate tax.
Canadian Residents Owning US Property
Canadian residents/citizens that own US situs assets (for example, a condo in Florida or shares of US corporations) may also be subject to US estate tax, levied on the full value of their US assets at the time of death. Canadians are entitled to a pro-rated exemption for US estate tax based on the ratio of the value of US assets in relation to total assets held at the time of death. This formula will effectively exempt Canadians with estate values of less than US $11.2 million (in 2018) from the application of US estate taxes. As well, a foreign tax credit will be available for any US estate taxes to offset taxable capital gains arising in respect of that property in Canada.
However, as is the case with US citizens, the pro-rata exemption available to Canadians is set to revert back to pre-2018 levels after 2026. Canadians with US assets may therefore want to consider life insurance or other planning strategies to deal with this contingency. As well, Canadian with total assets exceeding US $11.2 million (based on the 2018 exemption) should seek the advice of US tax counsel in terms of determining their potential estate tax liability and appropriate planning strategies. Again, if the person owns life insurance, additional planning may be required to ensure this does not affect the US estate tax exemption that is available on death.
Children in the US
It is increasingly common for the children of Canadian residents to go down to the US for their post secondary education. This may lead to marrying a US resident and/or obtaining a job in the US. If you are in this situation, you will want to design your estate plan to minimize the US tax and estate tax exposure of estate beneficiaries who become US residents or citizens. For example, a large gift under your estate to your daughter, now residing in California, could ultimately result in her estate having a larger US estate tax bill. As well, if you are the owner of a private corporation, a bequest of those shares to the daughter may expose her to certain US anti-deferral rules that allocate income to US resident shareholders, even though no distributions have been made by that corporation. Again, obtaining proper US and Canadian tax advice is important in navigating through both the Canadian and US tax rules that might apply in this situation.