Canada: So I Married An American...

Last Updated: March 6 2013
Article by Will Todd

The  good  news  is  that  it  is  definitely  better  than  marrying  an  axe  murderer,  but  there  may  be  "issues." Cross-border  couples  –  Canadian  families  that  have  one  spouse  who  is  an  American  citizen  –  raise particular planning challenges for tax and estate planning.  The United States applies its full taxation and compliance  regime  to  all  of  its  citizens,  even  when  they  do  not  reside  in  the  U.S.  This  means  that   U.S. citizens who reside  in Canada are subject to   taxation by both countries  –  Canada  because of residency and U.S. on account of citizenship.

U.S. Estate Tax Exposure Also Affects Planning for the Canadian Spouse

U.S. estate tax is a tax on wealth that applies to the estate off U.S. citizens and long-term residents and its conception         of  an  estate  is  much  broader  than  the  typical  Canadian  probate  estate.  For  example,  it includes   life   insurance   proceeds   and   assets   in   registered   retirement   accounts   and   many   trusts established  by  or  for  the  benefit  of  the  deceased.  Typical  cross-border  couples  expect  the  survivor  to continue to benefit from some or all of the wealth of the first  to die, but to  achieve this ordinary objective without   increased  exposure  to  U.S   estate  tax takes  planning  for  both   spouses.  Holding  property  in  joint title, or simply providing that the surviving spouse receives everything can increase estate tax exposure if the Canadian spouse dies first. The Canadian spouse needs a Will that provides, if the Canadian spouse is  the  first  to  die,  a  specially-structured  trust  for  the  benefit of  the  surviving  U.S.  spouse  that  will  allow limited use of the deceased Canadian spouse's  assets, but  not include those assets  in the estate  of the U.S.  spouse  on  his  or  her  later  death.  In  addition,  to  maximize  tax  planning  alternatives  and        flexibility should thhe U.S. spouse die first, the U.S. spouse should have a Will that will minimize U.S. estate tax by maximizing  exemptions  and  exclusions,  whether  flowing  from  the  U.S.  tax  code  or  the  Canada/U..S.  tax convention.

U.S. Gift Tax Complicates Planning  or Cross-Border Couples

Gifts from the U.S. Spouse to the Canadian Spouse have Annual $143,000 Exclusion

The U.S. has a complete exemption from its gift tax for gifts too U.S. citizen spouses, which is equivalent to the  Canadian  spousal  rollover,  but  a  different  rule  applies  to  gifts  to  a  spouse  who  is  not  American.  If there was no U.S. gift tax, U.S. persons could avoid paying  estate tax by gifting all of their assets before they die, but this "leakage" is prevented because the gift tax is imposed on the gift, essentially collecting the estate tax in advance. Recognizing that transfers between spouses are a necessary aspect off many marriages,  the  U.S.  allows  that  thee  first US  $1443,000 of  gifts  in  each calendar  year  too  be excluded  from U.S. gift tax, just as gifts up to US $14,000 to an person other than a non-U.S. spouse are also excluded from  U.S   gift  tax.  Often  an  ideal  use  of  the  annual  exclusion  is  to  transfer  to  the  Canadian  spouse portions  of  the  ownership  of  the  Canadian  principal  residence,  until  the  U.S.  spouse  owns  an  amount small enough that its portion of any gain does not exceed the US $250,0000 principal residence exclusion recognized for U.S. capital gains tax.

Gift Tax May Also Limit the Application of a Spousal Trust

A  typical  Canadian  estate  plan  may  include  a  spousal  trust  for  all  assets  of  the  first  to  die,  in  order  to allow the surviving spouse to continue to have some use of   the assets of the first to die   but also providing the  benefit  of  the  assets  being  within  a  trust,  including  the  deferral  of  gain  recognition  until  the  death  of the  survivor.  For  a  trust  to  qualify  as  a  spousal  trust  under  Canadian  law,  no  person  other  than  the spouse can receive or benefit from any of the income or capital of the trust during that spouse's life. For many Canadian families if most of the family assets are to be within the trust it could raise the question: what if one of the children "needs" a large gift (e.g., to help the child to buy a home). The usual Canadian solution to this  question is that the trustee could encroach capital from the trust to the surviving spouse, and  then  the  surviving  spouse  could  make  a  personal  gift  to  the  child.  Unfortunately, if  the  surviving spouse is a U.S. citizen, this gift would be subject to U.S. gift tax. As a result, cross-border families may be faced with a dilemma: obtain the benefits of spousal trust treatment or maintain the flexibility to provide capital to other family members. In the appropriate situation the solution may be to split the estate assets between a spousal trust (for assets that would otherwise be subject to recognition of capital gains), and a family trust in which the children are also beneficiaries (for assets that will not be subject to capital gains on the death of the first spouse).

Are Your Children U.S. Citizens, Too?

U.S.  citizenship  applies  to  Canadians  born  in  the  U.S.  (excluding  children  of  diplomats),  and  to  children born  with  at  least  one  U.S.  parent  (including  dual  nationals),  if  that  parent  grew  up  in  the  U.S.  On  the other hand, children of a U.S. parent who never resided in the U.S. or came to Canada when that parent was a young child are not U.S. citizens. The gap between an American who left the U.S. as a young child and those who left as adults is complicated because of many changes to the requirements under the law that apply to different ages and for different periods. There are favourable rules that limit the application of the tax on expatriation for U.S. citizens who are citizens of another country since birth.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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