In the United States and Canada alike, certain taxes are owed at death. These taxes are referred to as Estate Taxes. However, most Canadians are unaware that owning U.S. real estate may result in them being subjected to U.S. estate tax upon their death. Similarly, it is common for Americans living in Canada to be uninformed on the impact their Canadian assets might have on their U.S. Estate Tax at death.
The Internal Revenue Service (“IRS”), the government agency in the U.S. responsible for revenue services, imposes taxes on the deceased’s estate differently depending on if he/she is a U.S. citizen or green card holder, or a Canadian citizen and resident. In the case of an American citizen or green card holder, the estate tax is evaluated on the fair market value of your worldwide assets. In other words, regardless of where assets are located, they will be included to calculate the tax liability. In the case of a Canadian citizen and resident, the only assets that will be evaluated to determine the estate tax due to the IRS are those situated in the U.S.
Nevertheless, the United States provides for an exemption for both situations described above. Below we will examine the exemption rules pertaining to Americans living in Canada, followed by rules applicable to a Canadian owning U.S. real estate.
U.S. citizen or a Green Card Holder
In the case of an American citizen or a green card holder, their estate is exempt from paying federal estate taxes if their assets' fair market value is below USD 11.7 million (for 2021 and indexed annually). As mentioned above, the assets used to evaluate if the estate exceeds the exemption's threshold are not limited to those situated in the United States. Additionally, the exemption applies regardless of where the U.S. citizen or green card holder lives. Thus, Americans living abroad, such as in Canada, would still benefit.
If their asset's fair market value exceeds $11.7million, the estate will likely owe money to the American tax authorities. Consequently, the deceased’s estate would have to provide a U.S. estate tax return to declare the assets as well as any amount owed as a result. It should be noted that there are a variety of tax estate planning strategies that exist that may eliminate and/or defer any amount owed.
Canadian citizen with U.S. assets
A Canadian citizen will only be subject to U.S. federal estate tax if he owns assets located in the United States. In this context, the term "assets" includes various things such as real estate and shares of American corporations. However, the deceased’s estate will be exempt from the federal tax if it meets the criteria applicable to Canadian citizens and residents. The criteria are made up of two parts:
I. The value of the American assets; and
II. The value of worldwide assets.
Under the first part, if the value of the Canadian citizen and resident’s assets situated in the United States doesn’t exceed $60,000 USD, he will not owe U.S. federal estate tax. Consequently, a U.S. Estate tax return doesn’t have to be filed. However, if the assets' value exceeds the $60,000 USD threshold, the second part finds application.
Under the second part, the value of all the Canadian’s assets is evaluated. Thus, the country in which the assets are located no longer plays a part. The Canadian citizen's assets are evaluated to determine if they exceed the exemption amount of $11.7 million applicable to U.S. citizen and Green card holders. Suppose they exceed the $11.7 millions USD threshold (for 2021 and indexed annually), the Canadian citizen and resident will owe federal U.S. estate tax. If it doesn’t exceed the threshold, no tax will be owed.
The purpose of this article is to give a brief overview of the rules governing federal estate tax. U.S. federal taxes can be very complex and often difficult to understand without the proper knowledge. At Meditax, our lawyers and tax specialists can help limit the U.S. federal government's tax liability.