Perspective is important and illuminating--only about fifteen years ago, or perhaps even less, it was not common to have to consider the impact our Canadian and U.S. tax and legal regimes have on estate planning and our affairs in general. The 49th parallel and the world's longest undefended border symbolized separate tax and legal regimes, and there was little recognition of the need to consider the impact of the laws on either side of it, notwithstanding many Canadians living south of it and many U.S. citizens living north of it.
The new reality is increasingly "borderless". The current global agenda includes aggressive measures to ensure greater transparency and information exchange to stop leakage of tax revenues from financially-strapped governments. For example, between Canada and the U.S. under the Foreign Account Tax Compliance Act (FATCA) and our intergovernmental agreement with the U.S., Canadian tax authorities are now providing information on Canadian bank accounts of U.S. persons to U.S. tax authorities. Uncle Sam can now reach north to ensure its citizens are tax-compliant.
As another example of the free flow of information, as of June 30, 2014 when Canadians and Americans cross the border, their days spent are now computed and tracked by the U.S. and Canadian authorities when they enter and when they leave and this information is now shared. A Canadian can be treated as a U.S. resident for tax purposes and be subject to U.S. tax on their worldwide income if they meet the substantial presence test along with a number of other possible legal, health insurance and tax problems that can arise based on time spent in the U.S., and the information to do so is now readily available between the U.S. and Canada, unlike before.
Looking forward, the trajectory is towards increasing information exchange and transparency--not less, as the global agenda kicks in and moves into high gear. The question often posed "who is to know" is increasingly anachronistic, and even ingenuous, and it is important to come to grips with this new reality, and plan one's affairs accordingly.
In our prior blog post "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" we dealt with the problems arising from Canadians owning U.S. securities, subjecting them to potentially significant U.S. estate tax exposure of up to 40%--an issue that is still not sufficiently recognized by Canadian investors, the Canadian investment industry in general and investment advisors.
In our advisory "Will and Estate Planning Considerations for Canadians with U.S. Connections", we set out various estate planning issues for Canadians with U.S. connections, including Canadians married to U.S. persons or with children who are U.S. persons. U.S. persons resident in Canada face a number of tax issues. For example, a number of standard planning vehicles such as TFSAs and RESPs and even Canadian mutual funds can create tax issues for U.S. persons. As well, U.S. persons earning income through a foreign corporation, such as a Canadian holding company, or who have interests in certain Canadian resident trusts, face complex U.S. tax rules that must be carefully navigated.
In particular, U.S. beneficiaries of Canadian discretionary trusts where passive income may be generated and not distributed, require legal and tax advice to avoid potentially punitive and adverse U.S. consequences.
In conclusion, as stated at the outset, perspective is important. The ways of the past have passed. There is nowhere to hide. The Canadian - American conundrum has to be tackled and dealt with in a proactive manner. Time to get on with it.
- Margaret O'Sullivan
Please watch for our next blog post on the disclosure of information to estate and trust beneficiaries.
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.