Contact: Johanna C.C. Caithness; Fillmore Riley LLP (Manitoba, Canada)
Over the past number of years, it has become increasingly common for Canadians to purchase U.S. vacation home properties. Although purchases of U.S. property by Canadians might be less likely in the foreseeable future due to the nosedive of the Canadian dollar, it is important for existing Canadian owners to be aware of the implications of U.S. property ownership, particularly on death. This article is only a very general overview of some of the rules that affect Canadians owning U.S. vacation property. Note that this article does not deal with rental income, attribution or U.S. tax filing issues.
Where a Canadian resident (non-U.S. citizen) passes away owning U.S. situs property, their estate will be subject to U.S. estate tax. U.S. estate tax is based on the fair market value of assets at the time of death and the top rate is currently 40 per cent.
There is an exemption (called the “unified credit”) approximately equal to the tax on a $5.43 million estate for 2016, but the unified credit is pro-rated for non-U.S. persons based on the ratio of the value of the U.S. situs assets to the value of the person’s worldwide assets. It should be noted that the value of life insurance policies controlled by the deceased will be included in the value of their estate for U.S. purposes, even if their estate is not the beneficiary—this can have significant implications for the determination of the amount of the unified credit available.
Estate taxes may be deferred until the death of the survivor of a married couple where property is transferred to the surviving spouse, but if the surviving spouse is not a U.S. citizen, the deferral is only available if the property is transferred to a “qualified domestic trust” (“QDOT”). However, for Canadian spouses owning U.S. real property, there is a marital credit available under the Canada-U.S. Tax Treaty which effectively doubles the prorated unified credit available. It should be noted that the marital credit is only available if the estate foregoes the deferral that would be available through the use of a QDOT.
Where U.S. property is held jointly, with right of survivorship, 100 per cent of the value of the property could be included on the death of each joint tenant unless it can be shown that the surviving spouse contributed financially to the purchase of the property. In the majority of cases, it is far preferable to have spouses own U.S. real property as tenants-in-common (although this may result in the requirement to obtain probate of the will of the first spouse to pass away in order to transfer his or her interest in the property to the surviving spouse). Significantly, a discount may be applied to the value of the deceased’s interest in the property when a fractional interest is valued and this may result in an even lower value of the deceased’s interest in the property for estate tax purposes.
