VIEWS: 12 PAGES: 51 POSTED ON: 10/1/2012
Introduction to U.S. Estate and Gift Tax Mary Ellis, CA Agenda • U.S. Transfer Tax System • U.S. Estate and Gift Tax Basics • Future of U.S. Estate Tax • U.S. Estate Tax Exposure Calculations and Examples • Non-residents Holding U.S. Real Property 2 U.S. Estate Tax U.S. Transfer Taxes - Overview • Currently three U.S. federal taxes forming a comprehensive system of transfer tax can apply to transfers of property: – Estate tax: applies to transfers at death – Gift tax: applies to transfers during one’s lifetime – Generation skipping transfer tax: applies to transfers to beneficiary who is two or more generations removed from the transferor 3 U.S. Estate Tax U.S. Estate Tax vs. Canadian Deemed Disposition • U.S. Estate Tax – There is no deemed disposition and capital gains tax – U.S. estate tax is based on the FMV of property – The estate gets a step up in cost base to FMV at death (special rules for 2010) • Canadian Deemed Disposition – Taxpayer deemed to dispose of assets at FMV on death – Taxed on accrued capital gain 4 DTU - U.S. Estate Tax Common Client Situations • Canadians with U.S. real estate and / or U.S. securities • U.S. citizens living in Canada 5 U.S. Estate Tax Are you a U.S. Citizen? • Born in the U.S. • Parent(s) are U.S. citizens • Became naturalized 6 DTU - U.S. Estate Tax “Residency” for U.S. Estate/Gift Tax Purposes • Estate and Gift tax “residency” not the same as income tax residency • Residency is based on the “domicile” of the individual – Domicile in the U.S. (i.e., lives in the U.S. with no present intent of later leaving) taking into account all personal facts and circumstances including: statements of intent; length of U.S. residence; green card (a strong, though not necessarily conclusive, indication of intent); and ties to former domicile 7 U.S. Estate Tax Basis for U.S. Estate Taxation • U.S. citizens / residents are subject to U.S. estate tax on the FMV of their worldwide net estate (assets less liabilities) at death • Non-U.S. citizens and residents are subject to U.S. estate tax on the FMV of U.S. situs assets held at date of death 8 U.S. Estate Tax Basis for U.S. Estate Taxation • Some of the common U.S. situs assets include: – Real property located in the U.S. – Shares of stock of U.S. domestic corporations – Debt obligations of U.S. persons(not U.S. Gov’t. or corporate bonds) – Interest in U.S. partnership or foreign partnerships that holds U.S. situs assets – RRSPs and Canadian mutual funds - ????? Note: cash held in $U.S. with a non-U.S. financial institution is not a U.S. situs asset U.S. stocks held through Canadian Holdco not U.S. situs property 9 DTU - U.S. Estate Tax Basis for U.S. Gift Taxation • U.S. citizens/residents are subject to U.S. gift tax on the FMV of their gifts – Must be completed gifts (ex transferor does not retain an interest) • If completed - generally no longer part of transferor’s estate • If not completed - generally still part of transferor’s estate – Common example of gifts: transfers to trusts (ex family trust planning, estate freeze) 10 U.S. Estate Tax Basis for U.S. Gift Taxation • Non-U.S. citizens and residents are subject to U.S. gift tax on the FMV of tangible U.S. situs assets transferred by gift • Some of the common tangible U.S. situs assets include: – Real property located in the U.S. 11 U.S. Estate Tax U.S. Estate Tax • Taxed at graduated rates: – 2009 – tax rate range 18%-45% – 2010 – No more repeal year due to retroactive legislation; However option to elect for no estate tax and modified carryover basis – 2011 and 2012 – Maximum estate tax rate is 35% – 2013 onwards – If no new legislation, the top estate tax rate will go back to 18% to 55% with a 5% surcharge for estates between U.S.$10,000,000 and U.S.$17,184,000 12 U.S. Estate Tax U.S. Estate Tax • Applicable credit shelters the first $5,000,000 of assets in 2010, 2011 and 2012 ($3,500,000 in 2009) from U.S. estate tax for U.S. persons – 2013 onwards – If no new legislation, the credit will shelter $1,000,000 • Exemptions for transfers to charities • Deductions for accrued liabilities at death and funeral and administration expenses 13 DTU - U.S. Estate Tax U.S. Estate Tax • For non-U.S. persons, exemption is $60,000 • For (non-U.S.) Canadian residents, under Article XXIX-B(2) of the Treaty, alternative exemption can be claimed: – General exemption for the year * U.S. Estate/Total Estate • Simplified Example: based on $5m exemption for U.S. person – U.S. assets are $1.5m and non-U.S. assets are $4.5m – Exemption for (non-U.S.) Canadian resident: $5m *($1.5m/$6m) = $1,250,000 is sheltered from U.S. estate tax *See actual calculations later in the slides 14 U.S. Estate Tax U.S. Estate Tax • Unlimited marital deduction (rollover) for assets left to a U.S. citizen spouse • No rollover for assets left to non-U.S. citizen spouse (even if spouse is U.S. resident) • However, if there is a sufficient Canadian connection for the deceased or spouse, Article XXIX-B(3) offers an additional exemption equal to the general applicable exemption, for assets left to non-U.S. citizen spouse 15 U.S. Estate Tax U.S. Estate Tax • Article XXIX-B also provides for Foreign tax credit to offset a portion of Canadian tax payable on deemed disposition of property on death (provided timing of Canadian tax matches U.S. estate tax) 16 U.S. Estate Tax U.S. Gift Tax • Taxed at graduated rates – Top rate of 45% in 2009, 35% in 2010, 2011 and 2012 • Applicable credit shelters the first $1m in 2010 and $5m in 2011 and 2012 of lifetime gifts from gift tax • Use of any part of the $1m/$5m exemption reduces the estate tax exemption correspondingly 17 U.S. Estate Tax U.S. Gift Tax • Can make annual gifts up to the annual exclusions without using up the $1m/$5m exemption: – Unlimited gifts to U.S. citizen spouse – $134,000 gifts to non-U.S. citizen spouse – $13,000 gifts to each other donee 18 U.S. Estate Tax Future of U.S. Estate Tax • Currently… – President Obama signed Tax Relief Act on December 17, 2010 – 2010 Tax Relief Act is effective retroactively from January 1, 2010 with $5 M exclusion and 35% top rate – Decedents dying in 2010 have the option to elect for no estate tax and modified carryover basis – For 2011 and 2012: exemption of $5m, top rate of 35% • In the future … – Uncertainty after December 31, 2012 – ‘Sunset Clause’ – Automatic re-enactment in 2013 as rules existed before 2002 (i.e. exemption of $1m, top rate of 55%) 19 U.S. Estate Tax U.S. Estate Tax – 2009 Rates and Exemption Amount Example: Non-U.S. citizen/resident leaves property to non-U.S. citizen spouse Value of U.S. situs property U.S.$ 2,000,000 Value of worldwide estate U.S.$ 10,000,000 Gross U.S. estate tax U.S.$ 780,800 Applicable credit: Greater of: (i) $13,000; and (ii) (Treaty): value of U.S. situs property x $1,455,800 value of worldwide estate (291,160) Additional Non-citizen Spouse Treaty credit (291,160) Estimated U.S. estate tax liability U.S.$ 198,480 20 U.S. Estate Tax U.S. Estate Tax – 2011 Rates and Exemption Amount Example: Non-U.S. citizen/resident leaves property to non-U.S. citizen spouse Value of U.S. situs property U.S.$ 2,000,000 Value of worldwide estate U.S.$ 10,000,000 Gross U.S. estate tax U.S.$ 680,800 Applicable credit: Greater of: (i) $13,000; and (ii) (Treaty): value of U.S. situs property x $1,730,800 value of worldwide estate 346,160) Additional Non-citizen Spouse Treaty credit (346,160) Estimated U.S. estate tax liability U.S.$ nil 21 U.S. Estate Tax U.S. Estate Planning for Canadians • Canadian Holdco to own U.S. securities – Not be considered U.S. situs property – Careful if U.S. beneficiaries of estate inherit shares in Canadian Holdco 22 DTU - U.S. Estate Tax U.S. Estate Planning for Canadians • Spousal trust for U.S. citizen spouse – If Canadian individual dies and leaves assets to U.S. citizen spouse, the assets will be included in 2nd spouses worldwide estate and subject to U.S. estate tax – Leaving assets to spousal trust with limited access to capital may keep assets out of worldwide estate – Very strict drafting requirements to be exempt – seek U.S. legal council 23 DTU - U.S. Estate Tax Planning for Canadians Holding U.S. Real Estate • Non-Recourse Mortgage • U.S. Asset Trust • Single Purpose Corporation • Joint Tenancy • Tenancy-in-Common • Split Ownership • QDOT 24 DTU - U.S. Estate Tax NR Holding U.S. Real Estate – Example 1: Non-Recourse Mortgage • Non-Recourse Loan (i.e. only recourse is against real estate) serves to reduce value of real estate for Estate tax purposes. Non-U.S. Person / Owner Non-Recourse Loan U.S. Related person or Real entity or bank with Estate guarantee from person other than owner U.S. Estate Tax 25 Non-Recourse Mortgage • Client borrows funds and the debt is secured with a non- recourse mortgage on the property • The non-recourse mortgage can be obtained from client’s spouse, other related person or financial institution • Terms such as interest rate, amortization period and amount encumbered should be similar to those obtained commercially • Mortgage must be registered on title 26 DTU - U.S. Estate Tax Non-Recourse Mortgage • Dollar for dollar reduction in taxable estate for U.S. estate tax purposes (recourse mortgage debt must be pro-rated) • Reduction of exposure to U.S. estate tax • Interest expense may be deductible if borrowed funds are used to earn income from property • Income splitting if funds borrowed from higher income spouse 27 DTU - U.S. Estate Tax Non-Recourse Mortgage • To the extent the borrowing is done on a commercial basis, it would not be normal to encumber the value of the entire property • U.S. tax exposure will potentially increase as property appreciates (and the mortgage is discharged) 28 DTU - U.S. Estate Tax NR Holding U.S. Real Estate – Example 2: U.S. Asset Trust • Not subject to estate tax on death of settlor or beneficiaries • 21 year deemed disposition in Canada Canadian Settlor Cash Canadian Discretionary Trust Beneficiaries: Trustee Spouse purchases Children U.S. Real Estate 29 U.S. Asset Trust • Upcoming Purchase – Client settles cash on a discretionary, Canadian resident trust – Trustees, in the exercise of their discretion, use the cash to acquire the U.S. property for the beneficiaries – Client has no interest in the trust and thus no interest in the underlying asset that would be subject to U.S. estate tax on death 30 DTU - U.S. Estate Tax U.S. Asset Trust • Property already owned – Client transfers cash to the trust – Trust must purchase the U.S. property from the client at FMV supported by valuation – Gift of U.S. real estate would attract gift tax – Consider having trust pay proceeds with an interest bearing, secured promissory note to spread Canadian capital gains tax over 5 years – U.S. income tax must also be considered in respect of any resulting capital gain 31 DTU - U.S. Estate Tax U.S. Asset Trust • Elimination of U.S. estate tax • Possible deferral of Canadian tax on death • Elimination of probate fees • No Canadian taxable benefit issues for using the property • No U.S. or Canadian filings required unless income earned 32 DTU - U.S. Estate Tax U.S. Asset Trust • If property is sold, can use principal residence exemption to reduce/offset Cdn capital gains tax • Can wind-up trust and distribute property to the capital beneficiaries without capital gains tax if beneficiaries are Canadian residents; FIRPTA also avoided 33 DTU - U.S. Estate Tax U.S. Asset Trust • 21-year deemed disposition rule • Client must be prepared to relinquish any interest in the property and rely on goodwill of beneficiaries • Must access property as “guest” of a beneficiary or pay market rent to trustees 34 DTU - U.S. Estate Tax NR Holding U.S. Real Estate – Example 3: Single Purpose Corporation • No estate tax on death of shareholder • Limited liability Canadian • Potential Canadian tax issues Shareholder Canadian Corporation U.S. Real Estate 35 Single Purpose Corporation • Use of Canadian single purpose corporation to hold personal- use real property situated in the U.S. is no longer a planning alternative • The CRA announced the change in its administrative position regarding single purpose corporations in Income Tax Technical News No. 31 dated June 23, 2004 - revised November 24, 2004 36 DTU - U.S. Estate Tax Single Purpose Corporation • Use of Canadian single purpose corporation to hold personal- use real property situated in the U.S. is no longer a planning alternative • The CRA announced the change in its administrative position regarding single purpose corporations in Income Tax Technical News No. 31 dated June 23, 2004 - revised November 24, 2004 37 DTU - U.S. Estate Tax NR Holding U.S. Real Estate – Example 4: Joint Tenancy • Assume Husband provided the consideration with his own Funds • If Husband dies first, 100% of value included in U.S. gross estate (deemed to own 100% of asset); • If Wife dies first, no inclusion in her U.S.-gross estate (deemed not to own asset) • Conclusion: Joint ownership reduces flexibility Canadian Canadian Husband Wife Joint Ownership U.S. Real Estate 38 U.S. Estate Tax NR Holding U.S. Real Estate – Example 5: Tenancy-in-Common • Permits separate transfers of interests (each deemed to own 50% of asset on death) • Permits better use of Treaty exemption amounts Canadian Canadian Husband Wife 50% 50% U.S. Real Estate 39 U.S. Estate Tax NR Holding U.S. Real Estate – Example 6: Split Ownership • No U.S. estate tax on death of parents (as their interest does not pass to their estate on their death) Canadian Children or Canadian Parents Trust for their Benefit Life Remainder Interest Interest U.S. Real Estate 40 U.S. Estate Tax Split Ownership • The parent purchases a life interest in the real property and the children acquire the remainder interest • Critical that each party provides his/her own funds to avoid adverse U.S. gift tax implications • Valuation of the interests must be undertaken at the time of purchase to ensure that appropriate amounts are paid 41 DTU - U.S. Estate Tax Split Ownership • Elimination of U.S. estate tax for parent due to the fact that on death of parent, there is no remaining interest in the U.S. property • The parent who purchases the life interest acquires all the benefits and burdens of ownership for their lifetime, or the right to use, possess, and enjoy the property as long as he/she lives 42 DTU - U.S. Estate Tax Split Ownership • Restricted ability to deal with the property due to multiple owners • Children required to obtain their own funds (cannot be gifted from parents) 43 DTU - U.S. Estate Tax QDOT • Testamentary trust that is set up in both spouses wills if they have a U.S. property under tenants in common • Set up upon one spouse’s death if U.S. sole owner of property • Estate tax is deferred on death of first spouse • Property is transferred into the QDOT • Second spouse will be subject to estate tax on the whole U.S. property. 44 U.S. Estate Tax Life Insurance • Individual purchases life insurance in order to fund the potential U.S. estate taxes payable on death • At time of death, life insurance proceeds are used to fund U.S. estate taxes with any remaining funds to be left in estate • Inexpensive to implement • Maintains simplified structure 45 DTU - U.S. Estate Tax Rental Property – U.S. Filings • Rental Property is considered to be Fixed, Determinable, Annual, Periodic (“FDAP”) income. • Rental property is subject to a flat withholding rate of 30% • Can elect to make rental income effectively connected income (“ECI”). – U.S. return will need to be filed if election is made. – Can deduct rental expenses against income. – Taxed at graduated tax rates. 46 U.S. Estate Tax Selling of U.S. Property • Sale of U.S. Real Property requires an income tax filing. • For Personal/Trust holdings, gains taxed at either 15% or marginal rates. • If held in a corporation, taxed at 34% corporate rate. • Buyer is required to withhold 10% of selling price. • Seller can apply for a reduction of the withholding amount. Reduction would be equal to amount of capital gain that will be realized. • Form 8288-B can be filed if actual tax is les than 10% of gross proceeds. • Residence exception can apply if purchase price is $300K or less. 47 U.S. Estate Tax Contact Information Mary Ellis, Senior Tax Manager Deloitte & Touche LLP 20316 – 56th Avenue Langley, BC V3A 3Y7 Canada (604) 539-3615 48 U.S. Estate Tax Acknowledgements Heather Evans, Partner Marina Panourgias, Senior Tax Manager Peter Megoudis, Senior Tax Manager Global Wealth & Employer Services Deloitte & Touche LLP 181 Bay Street, Suite 1400 Toronto, ON M5J 2V1 Canada (416) 601-6150 Jyothi Rao, Tax Manager Global Wealth & Employer Services Deloitte & Touche LLP 2100 1055 Dunsmuir Street, Vancouver, BC V7X 1P4 Canada (604) 669-4466 49 U.S. Estate Tax *****Any U.S. Federal, state, or local tax advice included in this written or electronic communication was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed by any U.S. Federal, state or local governmental taxing authority or agency.***** 50 U.S. Estate Tax This webinar is brought to you by CCH Canadian and in partnership with Deloitte & Touche LLP Mary Ellis, Senior Tax Manager (604) 539-3615 For more information please contact customer service at 1-800-268-4522. Visit www.cch.ca/ExpertEdge for a full list of our webinars.
Pages to are hidden for
"Example Non US citizen resident leaves property CCH Canadian"Please download to view full document