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moneysense.ca, 20/04/10
U.S. Estate Tax changes will affect Canadians
Investors owning significant U.S. property need to be aware of changes coming to U.S. Estate Taxes (and you thought keeping up with the Canadian tax code was headache enough). With the tax cuts enacted by the Bush administration scheduled to expire at the end of 2010, estate taxes in the U.S. are expected to revert to higher rates that applied in 2001 and a lower estate tax exemption of $1 million. Unfortunately, these changes will impact Canadian citizens living in Canada and owning U.S. assets such as a vacation property, condominiums, securities trading in U.S. exchanges etc.
The US Estate Tax that Canadians might face is based on two factors: (1) The total value of their U.S. located property and (2) The proportion of their U.S. assets compared to their worldwide assets. Let’s take a concrete example. Canadian citizen and resident Peter owned $250,000 worth of US securities and his total estate is valued at $1,500,000. With Peter’s U.S. located property valued at $250,000, his estate will face a tax of $70,800 before exemptions in 2011. Since, 1/6th of Peter’s worldwide assets are located in the U.S., Peter will receive a prorated credit of $57,633 and a net U.S. Estate Tax of $13,166. As you can see in this example, even modest estates might be on hook to pay U.S. Estate taxes.
PS: In my previous post on U.S. Estate Taxes, I incorrectly mentioned that the then exemption of $2 million applied to U.S. property held by Canadians. As pointed out here, the exemption for Canadians will also depend on what proportion of their worldwide assets are located in the U.S.
moneysense.ca, 20/04/10
Boy, this really makes iShares look a lot better for US investments. I have VTI (Vanguard US equities) but after reading this I’m wondering if that is a good security to own.
I’ll have to think about this further.
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How would a regulator in the US know about the size of my total portfolio? Like most readers of your blog, I am a Canadian citizen and hold several USD denominated ETFs (e.g. VTI, VEA, VWO, DBC) because they are much cheaper to own than comparable ETFs in Canada and are fundamentally superior in other ways too (e.g. wider breadth of index, higher trading volumes, etc.) I don’t own any US real estate. It’s not clear to me how I will be affected by these changes. All of my USD denominated stuff is in my RSP so no witholding taxes are currently levied.
@Mike: Canadians typically will have some US stocks, a lot of Canadian stocks and bonds, a house and perhaps a cottage. In practical terms, how is the IRS ever going to audit and enforce the estate tax? Perhaps that’s the reason why only a few hundred non-resident aliens pay the estate tax every year. In any case, at present, we won’t be liable for US estate taxes even under the 2011 rules. Until the time that we are likely to get caught in the estate tax net, I’m going to keep investing in Vanguard funds.
US estate taxes and exchange rate commissions are two reasons why it would make sense for an ETF vendor such as BMO to introduce unhedged US, EAFE and emerging market ETFs with costs comparable to Vanguard’s.
@DM: We don’t own any US real estate but we do own US-listed ETFs (mostly VTI, VEA and VWO) in our RRSPs and non-registered accounts. It is not clear to me if US property held in a RRSP account is exempt from US Estate Tax calculations. I’m guessing not because I didn’t find anything that said it did not.
Like I mentioned in my previous comment, I’m not sure how the IRS is ever going to successfully audit estates of non-resident aliens with modest amounts of US property. In any case, this is something to keep in mind as our portfolios grow larger and we own significant amounts of US property.
For instance, a Canadian owning more than $1 million worth of US stocks would be liable for estate taxes because even assuming that he owned no other assets, the US property alone would exceed the exemption limit. I have no idea how the IRS will collect US Estate Taxes owed by Canadian estates that happen to own some US stocks.
@ CC: re your comment about the IRS collecting taxes – because the ETFs are based in the US (managed by US companies, authorized participants are US companies), my guess is that the IRS could simply seize the US based ETF shares owned by the Canadian and require the US ETF manager / APs to sell the seized shares and forward the proceeds to the IRS.
@Kim: I’m given to understand that US property might simply be frozen until estate declaration is filed. I’m not entirely sure how this would work for US stocks held in Canadian brokerage accounts but it seems plausible to me that assets will be frozen until reports are filed with various jurisdictions. In any case, this is something to be aware of and adjust holdings if US estate taxes threaten to be a huge issue.
Woudn’t estate tax comes into effect at the time of death? So, we wouldn’t have to worry until then don’t we
@Sasanam – true, but do you know exactly when your time will be up? Who knows, you could get hit by a bus tiomorrow.
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