Snowbirds who decide to buy U.S. real estate may run into a host
of cross-border tax traps, problems, and pitfalls. (See my previous article on these.) And if you
were hoping to pass along that little piece of paradise to your
heirs without a visit from the IRS, forget it. If you continue to
own the U.S. property until you pass away, you will be subject to
U.S. estate tax, which in the past has ranged from 18% to as high
as 55%. Luckily there are a few strategies to help you reduce or
eliminate the U.S. estate tax bite.
Currently, the U.S. estate tax rate ranges from 18% (where value
is less than US$10,000) up to 40% (on amounts exceeding US$1
million) on the fair market value of your U.S. property.
Prorated exemption is available
Fortunately, there is currently a US$5.34 million exemption
available for U.S. estate tax for U.S. residents/citizens. And
under the Canada-U.S. Tax Treaty, Canadians are allowed similar
treatment, although you must prorate the value of your U.S.
property against the value of your worldwide estate.
Essentially, Canadians are able to take advantage of a unified
credit, which can reduce or even completely shelter the U.S. estate
tax payable. In 2014, for U.S. residents, this credit is calculated
as the tax payable at a 40% rate on US$5.34 million (US$5.43
million in 2015) of assets, or about US$2.08 million (US$2.12
million in 2015). For Canadians, the exemption is prorated based on
the ratio of their U.S. assets compared with their assets as a
While tax relief provided under the Treaty may reduce or
eliminate the IRS tax take, there may still be instances where
Canadians are left with a U.S. tax liability. In this case, estate
tax that's paid may be eligible as a credit to offset Canadian
income tax on U.S. income. The Treaty also provides for a marital
credit where property is left to a surviving spouse.
The calculations can get complicated, so some expert tax help is
Avoiding U.S. estate tax has become a highly discussed topic in
Canada over the years. The CRA's announcement in 2004 clamping
down on so-called "single purpose" corporations meant
that U.S. estate-tax avoidance strategies have had to be
For example, the use of nonrecourse debt may reduce the value of
the property for estate tax purposes in the U.S. since the
lender's only recourse is to foreclose on the property.
So if a non-recourse debt is outstanding at the time of death,
the debt may reduce the value of the property, dollar for dollar,
thereby reducing the value of the property for U.S. estate tax
purposes. Accordingly, one may want to consider speaking to your
financial institution about putting a non-recourse debt in
The trust option
An alternative option could also involve holding the U.S.
property through a trust. This has become a more popular
alternative. A Canadian resident trust would be formed and
structured in such a way that while the U.S. property is in the
trust, no U.S. estate tax is payable.
The downside, however, is that since a Canadian resident trust
is deemed to sell all of its assets on every 21st anniversary of
the trust, there could be a Canadian capital gain tax hit if the
property has grown in value.
Accordingly, for Canadian purposes, it is important that the
property be distributed out of the trust before its 21st
anniversary. The use of a trust really only defers U.S. estate tax
to future generations who are beneficiaries of the trust. Note
– even though the trust would be a Canadian trust, you should
obtain U.S. tax advice to ensure it contains the proper drafting to
avoid U.S. estate tax during the lifetime of the trust.
On a happy note, if the U.S. property is a true rental
investment (and not a personal-use property), ownership of the
property in a Canadian holding company may still be an option
– but if the property is personal use, then this option could
result in Canadian tax to you.
As you can see, cross-border tax issues for Snowbirds who own
U.S. property can quickly become incredibly complicated. So even
though it might never occur to you to talk to your tax advisor when
buying a U.S. home, doing so could help you properly structure the
ownership of a U.S. property and avoid, or at least defer, U.S.
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The CRA provides new housing rebates for individuals who have purchased or built a new house or have substantially renovated a house or made a major addition to a house who plan on living in it personally or letting a relative live there.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).