Canadians who own U.S. securities may be surprised to find out that their investments may be exposing themselves to a tax as high as 40% on death. Without proper planning, an individual’s U.S. investments may be subject to U.S. estate tax, which will not provide the anticipated or desired result. This blog explores the problems of holding U.S. securities directly and some solutions to consider.
Canadian residents who are not considered U.S. persons (i.e. U.S. citizens and persons domiciled in the U.S.) are generally liable for U.S. estate tax on their U.S. situs assets. These may include, for example, a winter getaway in Florida or Arizona or shares in Apple or Amazon, which are listed on NASDAQ. For a more general list of the assets which may expose a Canadian resident to U.S. estate tax, check out our blog, U.S. Estate Tax Issues for Canadian Residents Who are Not U.S. Citizens or Residents, on the topic.
A security is a fungible and tradable financial instrument. It can include equity or debt or a hybrid. Familiar to most may be stocks in public companies which trade on a U.S. stock exchange or bonds or debentures issued by a U.S. company. This does not include cash deposits whether denominated in U.S. or Canadian dollars held at a U.S. or Canadian bank.
The maximum rate of U.S. estate tax is 40%, which is based on the value of U.S. situs property for a non-U.S. person. U.S. estate tax may be payable where the value of a non-U.S. person’s worldwide estate exceeds the U.S. estate tax exclusion amount, which is currently $11.58 million USD. Under the Canada-U.S. Tax Treaty, for a non-U.S. person there is a credit to offset U.S. estate tax against Canadian capital gains on the same assets, which can help to minimize double taxation to some degree.
Under the current high exemption amount, many may not need to undertake any special planning to avoid exposure. However, even where an individual falls under the exemption and no U.S. estate tax is payable, if the value of his or her U.S. situs property exceeds $60,000 USD, the executor of his or her estate may be required to file a U.S. estate tax return.
It is worth noting that there is a “sunset” provision and in 2026 the exemption amount will revert to its original $5 million USD amount indexed for inflation in 2026 (although, it may change sooner if there is a change in government), and the exemption amount should be carefully monitored.
There are ways an investor may restructure holdings to minimize or even entirely avoid U.S. estate tax exposure from directly held U.S. securities.
One consideration is to transfer any personally held U.S. securities to a holding company, which under Canadian income tax rules can be implemented on a tax-free basis. With a holding company comes annual compliance and filing requirements which must be considered. This may be an attractive option for someone who already has a holding company set up and is comfortable with the annual compliance requirements or who has a large holding of U.S. securities. Taxes and costs arising from holding investments in a Canadian corporation would need to be considered and weighed.
In addition to minimizing exposure to U.S. estate tax, this planning technique may also be appealing from an Ontario Estate Administration Tax (EAT) [commonly known as probate fees] planning perspective. Multiple wills can be used to minimize exposure to EAT, which is currently levied at approximately 1.5% of the value of the estate subject to EAT, and are often effective for individuals with assets in a holding company.
Another consideration may be to invest in Canadian mutual funds or Canadian-listed Exchange Traded Funds (ETFs) which invest in the U.S. market as opposed to holding U.S. securities directly. This option should be explored with the individual’s investment advisor to ensure that these investments still match his or her investment objectives.
Many Canadians holding U.S. securities directly would be surprised to find out that their investments may attract U.S. estate tax as high as 40% on death. As part of comprehensive estate planning, professional advice should be sought to consider how holdings can be structured in a tax efficient manner, including minimizing exposure to U.S. estate tax, while ensuring investment objectives are being met.
— Marly Peikes