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U.S. Securities and Other “U.S. Situs Property” – U.S. Estate Tax Issues for Canadian Residents Who are Not U.S. Citizens or Residents

Many Canadians own shares of U.S. publicly traded corporations and other U.S. securities which they may not know can expose them to significant U.S. estate tax on their death and require their executors to file a U.S. estate tax return and pay any U.S. estate tax due.

Pursuant to the American Taxpayer Relief Act of 2012, which was just enacted January 1, 2013, by Congress, and signed into law January 2, 2013, by President Obama, the maximum rate of U.S. estate tax has now increased from 35% to 40%. A unified estate and gift tax exemption continues in place where applicable, in an amount of approximately $5.25 million for 2013 (i.e., $5 million indexed for inflation from 2011).

Property located in or with a connection to the U.S. which is exposed to U.S. estate tax (“U.S. situs property”) can include:

• Shares of U.S. publicly traded corporations and units of U.S. mutual funds and money market funds, even if held in Canadian registered plans or in certain other vehicles;

• Deposits in a brokerage account in the U.S.;

• U.S. retirement plans and annuities;

• Assets of a business carried on in the U.S., such as shares of a U.S. private company;

• Certain debts with a U.S. connection; and

• U.S. real property and personal property usually located in the U.S.

Conversely, U.S. situs property may not include certain assets which appear to have a U.S. location or connection, such as:

• Canadian mutual funds invested in U.S. securities;

• Non-U.S.-issued securities listed in U.S. funds;

• U.S. bank deposits; and

• U.S. Treasury Bills or Certificates of Deposit.

If you are a Canadian resident and you own U.S. situs property, but you are not a U.S. citizen or a U.S. resident for estate tax purposes (see our previous post, “Who May Be a U.S. Citizen and Why It Matters For Estate Planning and Tax Compliance”), you may wish to consider the following.

If the value of your U.S. situs property at death is greater than $60,000 USD, your executors may be required to file a U.S. estate tax return. Furthermore, U.S. estate tax may be payable where the value of your worldwide estate for U.S. estate tax purposes exceeds the U.S. estate tax exemption amount (of $5.25 Million). Your worldwide estate for U.S. estate tax purposes includes certain assets which may not be obvious or considered part of your estate for Canadian tax purposes, including: the proceeds of certain life insurance policies on your life owned by you, the value of U.S. real estate, the full value of property jointly owned with right of survivorship (subject to limited exceptions and deductions) on the death of the first to die, and certain trust property. U.S. estate tax applies at graduated rates of up to 40% and is based on the value of the U.S. situs property, subject to applicable deductions, credits and exemptions (which may be pro-rated based on the value of your U.S. situs property compared with your worldwide estate). Note that in addition to U.S. estate tax which is levied at the federal level, certain U.S. states may also levy estate or inheritance taxes.

In order to transfer certain U.S. situs property after death, it may be necessary for your executors to obtain U.S. estate tax clearance. In addition, to obtain tax credits which may partially offset double taxation of Canadian income tax and U.S. estate tax on death allowable under the Canada-U.S. tax treaty, a U.S. estate tax return may need to be filed.

Various planning options are available to minimize or defer exposure to U.S. estate tax, for Canadian residents who are not U.S. citizens or U.S. residents for estate tax purposes, and who own U.S. securities which are subject to U.S. estate tax, including:

• Re-structuring U.S. equity-focused investments; for example, owning a Canadian mutual fund which is focused on U.S. equities rather than owning U.S. equities directly;

• Using a holding company to own U.S. securities, subject to conditions;

• Gifting U.S. situs property to certain U.S. charities on death;

• Obtaining life insurance to fund any U.S. estate tax liability.

Professional advice is recommended when planning for U.S. estate tax, including cross-border estate, trust and tax advice which can provide an effective, integrated solution.

As this is our first blog post in 2013, we wish everyone a very happy New Year.

Our next post: a checklist of issues to consider in multi-jurisdictional succession planning.

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.