Most industries across the globe have been affected by recent world events. As lawyers, we've had to address new trends and demands in the market, including greater complexity in Canada/U.S. cross-border personal tax and estate planning.
Times of uncertainty often serve as a harsh reminder of the importance of having a proper estate plan in place. In addition, you have to factor in lockdowns and social distancing, and more people at home, thinking about estate planning and getting their affairs in order.
This is especially true for snowbirds who would normally be heading to warmer climates but face travel restrictions. With restrictions likely to be in place for the foreseeable future, Canadians who own U.S. vacation property may find it prudent to sell, rent or downsize their vacation homes.
Canadians are also revisiting their cross-border personal tax and estate planning with the expectation of increased taxes due to government funding of pandemic-related economic relief and the upcoming change in the U.S. presidency.
Individuals, families or trusts with U.S. ties (i.e., U.S. citizenship, U.S. assets, Canadian trust with a U.S. person beneficiary, U.S. residents moving to Canada) should seek proper cross-border personal tax and estate planning advice to protect and preserve assets. Additionally, Canadians selling U.S. property, and/or moving back to Canada after living in the U.S., should consult with cross-border advisors to review potential tax consequences and planning opportunities before they arrive in Canada.
U.S. citizens already living in Canada should ensure that their estate planning documents consider their U.S. citizenship, and the U.S. citizenship or U.S. residency of their issue, in order to avoid large tax bills from the IRS, both during their lifetime and at their death.
Michael Cirone is a Canadian and U.S. lawyer with 20 years of experience providing cross-border personal tax and estate planning services. Recently, Cirone's practice has seen an increase in inquiries in the following areas:
- Planning and preparation of cross-border Wills ("CB Wills") for U.S. citizens living in Canada. U.S. citizens living in Canada should ensure they have a proper CB Will to avoid a 40% U.S. estate tax on the net fair market value of their assets. More often than not, the solution requires proper trusts for a surviving spouse and Dynasty Trusts for U.S. citizen or U.S. resident children to protect against U.S. estate tax, third-party creditors and division of assets upon marital breakdown.
- Planning and preparation of cross-border Alter Ego Trusts ("CB AETs") and Joint Partner Trusts if the U.S. citizen is married. For U.S. citizens living in Canada who are at least 65 years of age, CB AETs provide many benefits including acting as a Will substitute, saving Ontario Estate Administration Tax and acting as a Power of Attorney for Property substitute in the case of incapacity. CB AETs normally include testamentary Dynasty Trusts for U.S. citizen or U.S. resident children and their issue.
- Advising U.S. residents moving to Canada. Prior to moving, U.S. residents migrating to Canada should obtain cross-border advice on the types of business structures, estate plans and investments that don't work well once they become Canadian tax residents, as well as Canadian tax residency planning and provincial estate planning.
- Planning and set-up of cross-border structures for Canadians buying U.S. real estate. It is easier and more cost-efficient to set up the proper cross-border structure prior to purchasing a U.S. property. Once the purchase has been completed, any reorganization of the ownership structure for greater tax efficiency will be more costly and time-consuming since, among other requirements, a transfer of U.S. real estate by a Canadian requires compliance with the U.S. Foreign Investment in Real Property Tax Act.
- Lifetime gifting strategies to eliminate U.S. capital gains taxes on the sale of a Canadian principal residence. Capital gains on a Canadian resident's principal residence are tax-free, however, U.S. citizens living in Canada are only exempt from the first $250,000 (USD) of gains for U.S. income tax purposes. It is likely that the lifetime U.S. gift tax/U.S. estate tax exemption established under President Trump of $11.7M (USD) (applicable for 2021) will decrease under the Biden presidency, especially considering that the Democrats will control both the U.S. House of Representatives and the U.S. Senate, possibly back to the pre-Trump $5.49M (USD) (applicable for 2017) or lower. And even without any changes by the Biden presidency, the exemption will automatically decrease back to the $5.49M (USD) as of January 1, 2026. Consider implementing a lifetime gifting strategy before the higher exemptions are no longer available.
This article was originally posted on the Ontario Bar Association website.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.