Lured by balmy weather and a hotter national currency, Canadians have been flocking to the U.S. to shop for vacation properties. Easily overlooked in the swirl of excitement surrounding a purchase, however, are the tax implications of ownership.

The U.S. imposes a federal estate tax on the worldwide estates of all its citizens, as well as U.S. residents. It also imposes an estate tax on non-citizen non-residents who own U.S. situs property, which includes stocks of U.S. corporations, even if the stocks are owned in a Canadian brokerage account, and U.S. real property. If however, the real property is owned by a properly structured residence trust, it will not be subject to U.S. estate tax.

For Canadians who are concerned with the estate tax implications of becoming a U.S. property owner, the first step is to determine their potential estate tax liability. American citizens and residents enjoy a tax credit that shelters the first $5 million of their estate from taxation, but the Internal Revenue Code reduces the exemption to a meager $60,000 for non-citizen non-residents. While the $60,000 may be able to protect a few U.S. stocks from estate tax, it’s a safe assumption that for most snowbirds it will not be enough to shelter an entire vacation home. The federal tax is applied at a maximum rate of 35 per cent (which is subject to future legislative change) and additional state tax may be due, depending on where the property is located.

The U.S.-Canada Income Tax Treaty increases the exemption for Canadian residents, allowing them a portion of the $5 million available to U.S. citizens and residents. The amount of the treaty exemption is determined by multiplying the $5 million exemption by a fraction, the numerator of which is the value of the decedent’s U.S. situs property and the denominator of which is the decedent’s worldwide property (including jointly owned property, retirement accounts, beneficial interests in certain types of trusts and possibly even life insurance benefits paid on the decedent’s death). The prorated exemption can be doubled for property passing to a surviving spouse.

The difficultly in determining whether the purchaser will have enough exemption is the great unknown of what the U.S. Congress will do next. The $5 million exemption is scheduled to decrease to $1 million on Jan. 1, 2013. Congress may enact legislation extending or even increasing the $5 million exemption or they may allow it to roll back to $1 million. Considering that non-citizen non-residents are only entitled to a prorated portion of the exemption, many Canadians who would not have any estate tax liability when the exemption is $5 million may have to pay U.S. estate tax if the exemption returns to $1 million.

If a purchaser determines after crunching the numbers that they could benefit from using a residence trust, they should answer these two questions before any comprehensive planning takes place: First, if a mortgage is required, will the bank allow the property to be owned in trust? Second, does the homeowner’s association, condo board or like organization allow real property to be owned in trust? If the answer to both questions is yes, the purchaser can proceed with a residence trust.

The key feature of the residence trust strategy is that the person funding the purchase may not be a beneficiary or a trustee of the trust — it is only by giving up all rights to the property that it can be excluded from the purchaser’s estate. If the purchaser is married, the purchaser’s spouse and descendants (and anyone else the purchaser chooses) can be beneficiaries of the trust. So long as the spouse is alive, the purchaser can use the property rent free. But after the spouse’s death (or if the purchaser is not married), the purchaser must pay fair market rent to the trust in order to continue to use the property. A U.S. advisor should be consulted when drafting the trust to make sure it contains the provisions needed to keep the property from being included in the purchaser’s, beneficiaries’ or trustee’s U.S. estate.

Several formalities must be followed in order for the residence trust to remain outside of the purchaser’s estate. The sale contract should be signed by the trustee and the trustee should open a bank account in the name of the trust. The person funding the purchase would then transfer funds to the account and the trustee uses this account to complete the purchase.

Even though the use of a residence trust involves some additional planning and cost on the front end, if implemented correctly it can result in significant U.S. estate tax savings down the road.

http://www.lawyersweekly.ca/index.php?section=article&volume=31&number=26&article=4

Manitoba Ford Truck Dealer
Furnasman’s Winnipeg CBC One Hour Heating
Midtown Ford Winnipeg Facebook
www.crossfireconsulting.net

• Tax Breaks For New Home Buyers According to The American Housing Rescue and Foreclosure Prevention Act of 2008, passed by Congress in July, first time home buyers who purchase homes between April 8th 2008 and July 1st 2009 are eligible for...
• Manteca Park Golf Course, Manteca, CA Manteca Park Golf Course is located in Manteca, CA Phone: 209.825.2312 Website: http://www.ci.manteca.ca.us/golf Course History: When the course first opened in 1966, it was a simple nine hole executive course. However, the second nine were...
• Check Property Taxes by Address Imagine buying a car without knowing the price of gas. Would you be more inclined to buy a sexier sports car or a more rugged SUV? I would. How about buying an appliance without the...
• Is Blackstone the McDonald's of the private-equity world? Recently, it announced the $41 billion purchase of the Hilton chain of hotels. With this purchase, Blackstone now owns 700,000 hotel rooms across the globe. Sounds suprisingly similar to McDonald's modus operandi. McDonald's owns prime...
• The Great British Hertiage Pass The Great British Heritage Pass was established over 30 years ago by VisitBritain (formerly known as the British Tourist Authority). It is run by the Leisure Pass Group – a tourism specialist in creating and...