Example Non US citizen resident leaves property CCH Canadian by alicejenny

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									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.


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