The Implications of the US Estate Tax Exemption on Canadians

We had the pleasure of having Kevin Gluc, cross-border specialist and partner of Hodgson Russ LLP, lead us through how United States estate tax impacts our planning.  Kevin focussed on two specific circumstances to watch for:

US Citizen clients

Unlike Canada, the US taxes are based on citizenship and residency.  Even if your client has no other connection with the US, if he or she is a US citizen, US estate tax (and gift tax) may be applicable to them.

Each US person (a US citizen or resident, including green card holders) has a basic exemption amount.  If the US person’s estate is less than that amount, no US estate tax is chargeable. 

Currently, US citizens and US residents have an exemption of $11.7M (US$) for gift and estate tax. For married couples, this exemption stands at $23.4M.   

If a US person dies with an estate of more than the exemption (minus any amounts of the exemption used up to shield gifts during lifetime), the amount up to the exemption is not taxed, but any excess amount is taxed at 40%. 

The law was drafted with an expiry date in 2026.   If there is no other change, the exemption will revert back to $5.6M. However, the Biden administration could further lower the exemption.

Canadian Citizens with US property

The US may also taxes Canadian citizens if they own US situs property, such as real estate and US stocks (even in an RRSP).   Practically, though unless the Canadian citizen has worldwide assets (US and Canadian and any other jurisdiction) exceeding the Exemption, no US estate tax will be payable.  However, there are a number of expensive US filings that will have to be done even if no estate tax is payable.

Biden Tax Proposals 

Biden’s campaign proposal discussed reducing the exemption to $5M, or perhaps even lower, and proposed eliminating the step-up in cost basis at death. 

For now, it doesn’t seem like the estate tax exemption will be changed. However, there is a possible dramatic increase in the capital gain rate along with the possible elimination of the basis step up on death.

Red Flags for Canadian Practitioners 

As a Canadian practitioner, what should you be looking out for? Here are five red flags to become familiar with:

1. If your client owns any US assets such as US real estate, US tangible personal property, or US stocks (even in an RRSP) you should alert them of possible US tax issues that may apply.
2. If your client spends more than 120 days per year in the US, it is very likely that they will have to file US tax returns. 
3. It is always a good idea to inquire whether your client has any US connections. Are their parents American? Were they born in the US? Do they have any children born in the US? If so, annual US tax filings may be required.
4. If you’re working with a client that owns Canadian private company shares and they are planning on doing an estate freeze, it is always imperative to ask if anybody involved is a US citizen. 
5. If a beneficiary under a will is a US citizen, you should consider discussing setting up a trust for that beneficiary in order to protect them from US estate taxes. 

We are going to have Kevin back to discuss US real estate planning for Canadian citizens. Stay tuned!