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Who May Be a U.S. Citizen and Why It Matters For Estate Planning and Tax Compliance

Could you or someone you know be a U.S. citizen without knowing it, and maybe even without having lived in the United States? In this post, we discuss how someone can be a U.S. citizen by virtue of jus sanguinis - blood relationship - and some resulting tax implications.

By way of background, due to many factors, including geopolitical and socio-economic ones, many of us have a U.S. connection. In the 2006 Canadian census, approximately 1% of Canadians reported having an "American" ethnic origin. Under U.S. rules, depending on various factors, a child born outside the United States to one or more U.S. citizen biological parents may have acquired U.S. citizenship at birth by transmission from his or her U.S. parent(s), including: the date the child was born and the laws in force at the time; when and for how long the U.S. citizen parent(s) resided in the United States prior to the birth, and perhaps whether the child's parents were married to one another at the time of the birth. 

For example, if you were born in the 1960s or 1970s in Canada to one U.S. citizen parent, and prior to your birth that parent lived continually in the U.S. until age 18, you may be a U.S. citizen. There are also other types of "accidental" Americans, including a child born in a U.S. hospital, perhaps near a border town or while their Canadian parents lived in the U.S. for employment reasons.

U.S. citizenship confers various rights and obligations, including for dual U.S.-Canadian citizens resident in Canada. U.S. citizens are subject to the U.S. income tax regime and annual U.S. tax compliance, an annual U.S. financial reporting regime (including possible requirements to file a Foreign Bank and Financial Account Report ("FBAR")), and U.S. transfer taxes, including estate tax, gift tax and generation-skipping transfer tax. Of particular interest for estate planning is that U.S. citizens are subject to U.S. estate tax on death.

U. S. Estate Tax

Generally, for U.S. citizens, U.S. estate tax is calculated based on the value of the worldwide estate at graduated rates of up to 35% subject to applicable deductions and exemptions. At present, an exemption amount of approximately $5 Million is available with respect to estate tax and tax on certain gifts made during lifetime. The exemption amount will be reduced to $1 Million and the maximum rate increased to 55% on January 1, 2013, unless (and post January 1, 2013, until) Congress makes legislative changes. The worldwide estate also includes certain assets that are not obvious such as proceeds of life insurance policies a deceased person owns on his or her own life, the gross value of property held in joint tenancy with right of survivorship (subject to limited exceptions and deductions), and certain interests in a trust. Limited relief from double taxation for payment of both U.S. estate tax and Canadian income tax on the same assets on death may be available pursuant to the Canada-U.S. tax treaty.

Estate planning strategies are available where a person or his or her spouse, or an intended beneficiary is subject to U.S. estate tax. For example:

  • Under a will, a "by-pass" trust can be created to pass assets to a U.S. citizen so that the assets do not form part of his or her estate upon death; and
  • The estate plan can take into account the expected use of available credits, deductions and/or exemptions relating to U.S. estate tax including under the tax treaty between Canada and the U.S.

If you think you may be a U.S. citizen, professional advice is needed to determine your status and your annual tax compliance. If you are a U.S. citizen, or if you intend to benefit a U.S. citizen on your death, you may wish to minimize your estate's exposure to U.S. estate tax through advance planning. A customized estate plan can be created taking into account relevant cross-border considerations.

Claudia A. Sgro

We look forward to our next post on the topic of the "trusted advisor".

The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. In particular, they are not intended to provide U.S. legal or tax advice. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.

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