This Advisory will discuss common issues that can arise when a person dies and his or her estate has connections with one or more jurisdictions outside of Canada. Some of the issues arising for an estate with cross-border Canada-U.S. connections also arise for an estate with multijurisdictional connections and are explored in our Advisory "Cross-border Canada-U.S. Estate Administration Highlights".
In this Advisory, we use the term "estate trustee", the term used for the legal representative of an estate under the Ontario Rules of Civil Procedure. The term executor (where the deceased died with a will) or administrator (where the deceased died without a will) are the traditional terms used for this role.
A multijurisdictional estate can have many complications, as well as being subject to special legal rules which determine which jurisdiction's laws will apply in a specific case. Issues will arise where an Ontario estate (the deceased died or had most of his or her assets in Ontario) has a foreign connection, or where a foreign estate (the deceased died or had most of his or her assets outside of Canada) has some Ontario connection. While this Advisory focuses on Ontario legal matters, many of the issues discussed are equally applicable to other Canadian provinces and territories.
PRACTICAL CHALLENGES ARISING IN MULTIJURISDICTIONAL ESTATE ADMINISTRATION OR AN ESTATE WITH FOREIGN AFFILIATIONS
No matter where a deceased person lived or held assets during his or her lifetime, and which legal system(s) his or her estate is subject to, when his or her estate has multijurisdictional or foreign connections a number of practical challenges can arise, including:
- Locating assets in various jurisdictions and creating a comprehensive asset list;
- Locating the last will and determining whether the deceased had more than one will, such as separate situs wills to deal with assets in a particular jurisdiction, and if so, whether they are valid;
- Carefully considering the assets of each estate under each will, in particular where multiple wills do not provide for the same set of beneficiaries or the same entitlement for each beneficiary;
- Determining the deceased's debts and tax liabilities in all jurisdictions and who has the obligations to pay them: the estate and/or the beneficiaries;
- Determining which jurisdictions require advertising for creditors, which make it desirable as a protection for the estate trustee, in which place to advertise, and the costs of doing so;
- Dealing with foreign language and translation challenges, such as obtaining official translations of any documents as necessary, and efficiently communicating between estate trustees, beneficiaries, creditors, asset holders, professional advisors, including managing time zone challenges, courts, etc.;
- Managing expectations in regards to administration timelines and delays associated with foreign processes, as well as potential increased costs, both for the estate and beneficiaries;
- Understanding different legal rules and processes regarding reporting and handling of estate funds;
- Navigating foreign documentation requirements and certification of copies of documents – some jurisdictions will require a Court-certified copy of a document or an "apostille" (an internationally recognized type of certified copy), and will not accept notarial copies of documents as proof of authenticity. Canada recently joined the 1961 Hague Convention Abolishing the Requirement for Legalisation for Foreign Public Documents ("the Hague Apostille Convention") on May 12, 2023, which came into effect on January 11, 2024, and therefore documents no longer have to be authenticated by the Government of Canada and foreign embassy or consulate which previously involved additional steps.
ONTARIO ESTATE WITH FOREIGN CONNECTIONS
An Ontario estate can face complications due to the presence of any of the following: a person died and had a different citizenship (or additional citizenship) or place of birth, the beneficiaries have foreign residency, or the person owned foreign assets.
Ontario Estate if Deceased is a Foreign Citizen, Emigrated from Another Jurisdiction or Retains Other Ties to Another Jurisdiction
The U.S. and Eritrea are the only two countries in the world that tax based on both residence and citizenship. Other countries tax worldwide income of a person that resides in the country, but not citizens residing in another country.
A person who emigrated from another jurisdiction may still have ties to his or her country of origin which must be considered. For example, the deceased may have relatives or friends whom he or she wishes to benefit who live there or may still have assets or debts in his or her country of origin or in another country in which he or she has lived; or there may be foreign laws which affect the deceased's estate and its beneficiaries. It is important to investigate such matters to ensure that nothing is overlooked.
Ontario Estate With Foreign Resident Beneficiaries
Practical Issues
Practical issues such as managing foreign currency and exchange issues, in particular when gathering in assets and making distributions to non-resident beneficiaries, and additional complexities of making distributions where sending a cheque by mail or hand-delivering personal effects is unwise or unavailable, arise where an estate has foreign beneficiaries.
Income Tax Issues
Income tax issues relating to distributions to non-resident beneficiaries can include:
- Withholding tax issues - income which is paid or payable to a non-resident beneficiary is subject to non-resident withholding tax under Canada income tax rules. The estate trustee is liable to withhold the appropriate rate of tax of 25% (unless reduced by treaty) and complete certain tax filings;
- No rollover - there is generally no "rollover" of capital gains when a Canadian resident estate distributes property to a non-resident beneficiary which can result in capital gains being triggered and payable by the estate on post-death capital gains, although a rollover will apply if "taxable Canadian property" (see definition below) is distributed;
- Section 116 certificate requirements - section 116 of the
Income Tax Act (Canada) imposes an obligation on a non-resident
person who disposes of property which falls within the definition
of "taxable Canadian property" to obtain a clearance
certificate. Taxable Canadian property includes:
- Real property located in Canada;
- Assets used in a business in Canada;
- Shares in a private Canadian corporation where more than 50% of the value of the shares is derived from Canadian real property or certain Canadian resource property;
- A distribution to a beneficiary of a capital interest in a trust (which includes an estate for purposes of the Income Tax Act) will qualify as a disposition under these rules if the value of the trust/estate within the 60 months previous to the distribution was more than 50% derived from Canadian real property. Practically speaking, if the distribution is being made with cash from the estate, there will be no taxable gain and generally only the filing of certain forms may be required. Failure to ensure proper steps are taken under s. 116 could result in personal liability to the estate trustees for any unpaid tax;
- Interest in a Canadian or Ontario corporation - problematic issues may arise where a foreign beneficiary holds an interest in a Canadian or Ontario private corporation, in particular under the beneficiary's domestic tax laws. For example, a U.S. resident may be exposed to double taxation on earnings of the corporation due to a mismatch of foreign tax credits and be subject to certain filing requirements. Also, if the corporation is a Canadian controlled private corporation it may lose its status if it becomes controlled by foreign-resident shareholders.
Ontario Estate With Foreign Situs Assets
Forced Heirship
Most civil law jurisdictions have some form of "forced heirship" rules. These are sometimes referred to as "mandatory family protection" rules in those jurisdictions, indicating the difference in mindset between civil and common law jurisdictions regarding testamentary freedom and inheritance issues
Each civil law jurisdiction has its own rules regarding what portion of an estate is subject to forced heirship and who is entitled among family members and in what proportions, as well as in some cases "clawback" rules which take into account gifts made during the deceased's lifetime.
Muslim countries which follow Sharia have similar legal rules, usually applicable to assets located in the jurisdiction, and which may exclude non-Muslims living there as well as assets located abroad.
If the deceased is a "national" (i.e. a citizen) of, or has a relevant affiliation with, a jurisdiction with forced heirship rules, or owns assets in the foreign jurisdiction, and has beneficiaries in Ontario and/or in the foreign jurisdiction, his or her estate may be subject to these forced heirship rules. In one Ontario case, Granot v. Hersen, the Court held that the forced heirship rules under Swiss law applied to an estate asset in Switzerland, in that case a condominium, as under Ontario rules, the law of where real property is located should govern its succession.
Foreign Family Law Regimes
Foreign family law in another country can affect who is entitled to an estate on death. A key issue is what law governs the property rights of the deceased person and his or her spouse in determining who is entitled to property on death and the validity and effect of the deceased's will.
This issue will be particularly important where the last common habitual residence of the spouses was not in Ontario. Section 15 of the Family Law Act (Ontario) provides the law of the couple's last common habitual residence applies in determining matrimonial property rights, with a tie-breaker rule if they had no such common residence.
If the applicable matrimonial regime is a form of "community of property" (that is, the spouses' property acquired during the marriage is considered jointly owned with certain exceptions), this may limit what a spouse may dispose of in his or her will.
Other Foreign Laws Regarding Succession to Assets on Death
Foreign registered accounts and pensions will likely be governed by the law of the jurisdiction where the asset is located, including with regard to the determination of who is the beneficiary of the account and whether the deceased's will governs who is entitled. In many civil law jurisdictions, beneficiaries inherit assets directly from a deceased and are responsible for the deceased's debts and liabilities. These rules can affect the administration of assets and payment of debts in other jurisdictions.
Foreign Tax Considerations
Tax filing requirements in multiple jurisdictions need to be completed with appropriate professional advice. Knowledgeable professional advice is a necessity in multijurisdictional estate administration – many tax advisors will not be familiar with international and multijurisdictional tax issues or bi-lateral tax treaties. Canada only has two tax treaties which deals with taxation on death: with the U.S. and France.
Where there is no tax treaty between Canada and the jurisdiction in which assets are located, double taxation can arise, creating further challenges.
Consideration also needs to be given to privacy and confidentiality issues in making tax filings. This is particularly important as more jurisdictions enact beneficiary and other disclosure rules.
Ontario estate trustees should not make the mistake of thinking that there will be no tax consequences if foreign reporting is not done. "How will the tax authorities in the other jurisdiction ever find out?" is a common question. The current global agenda for governments includes aggressive measures to ensure greater transparency and information exchange in order to stop leakage of tax revenues due to non-reporting across borders. Further, failure to accurately report taxable income or gains or file required tax returns can result in personal liability for an estate trustee, including substantial penalties, particularly if deliberate tax evasion is involved.
Responsibility for Foreign Tax Liabilities and Filings
What right does a taxing authority have to enforce tax liabilities in a foreign jurisdiction against the estate trustee of the estate in the foreign jurisdiction? A general rule of private international law is that the courts of one country will not enforce, directly or indirectly, claims made for taxes of a foreign government
However, protocols and conventions entered into between jurisdictions may modify this general rule, many of which are now in place between Canada and other jurisdictions, and which continue to be entered into each year. Many countries have determined that it is in their best interests to provide information and allow enforcement of foreign income tax obligations in their jurisdiction in order to obtain reciprocal benefits from other jurisdictions.
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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.
