Under U.S. tax rules, the transfer of property during one’s lifetime, as well as at death is subject to taxes. However, different rules apply depending on your status – either as a U.S. citizen, or resident. Added to this, who is considered a resident under U.S. estate tax rules, differs from the definition of a resident for income tax purposes. If subject to U.S. estate tax rules, it’s important to be “in the know?”
U.S. Estate Taxation & Residency
For income tax purposes, U.S. citizens and residents are taxed on their worldwide income, while non-residents are taxed on only U.S.-sourced income. However, for estate tax purposes, both U.S. citizens and individuals domiciled in the U.S. have their worldwide assets subject to U.S. estate tax. For individuals not domiciled in the U.S., the tax exposure is limited to U.S.-situs property. Now, while estate tax is assessed based on the fair market value of an individual’s gross estate at the time of death, fortunately, there are some permitted credits and deductions.
Credits and Deductions
The deductions permitted by an estate varies. It depends somewhat on whether the taxpayer is a U.S. citizen, domiciled in the U.S., or not. Fortunately, there are other credits and deductions applicable when trying to figure out U.S. estate tax. These include:
- The unified credit – resulting in the first $11,400,000 (2019) of assets being free of gift, or estate taxation in one’s lifetime. If not domiciled in the U.S., this amount generally results in only the first $60,000 of U.S.-situs assets being transferred free of U.S. estate, but not U.S. gift tax.
- The marital deduction – which permits property to be transferred to a surviving U.S. citizen spouse. This results in the deferral of U.S. estate tax until the death of the surviving spouse.
U.S/Canada Tax Treaty Relief – U.S. Estate Tax
Fortunately, Article XXIX B of the U.S./Canada Income Tax Treaty provides relief from U.S. estate tax for many Canadians:
- For U.S. citizens and individuals domiciled in the U.S., a foreign tax credit may be available on a U.S. estate tax return for Canadian taxes paid with respect to non-U.S. assets.
- For non-U.S. domiciled Canadian individuals, it may be possible to claim a higher unified credit (i.e. the proportion of a citizen’s credit that equates to the portion of U.S.-situs assets relative to worldwide assets). However, information regarding worldwide assets must be provided to the IRS to access this credit.
- In addition, residents of Canada are exempt from U.S. estate tax, if the value of their worldwide estate does not exceed US 1.2M.
- For both U.S. citizens and individuals domiciled in the U.S., as well as non-U.S. domiciliary individuals, Canadians may be eligible to claim an additional unified credit.
U.S. Estate Tax Filing Requirements
Keep in mind that the estate is required to file a tax return within nine months of the decedent’s date of death, unless an application is made for a six-month extension. The return is filed by a U.S. citizen and resident alien decent using a Form 706, United States Estate Tax (and Generation-Skipping Transfer) Tax Return, if the gross estate exceeds US$11.4M in 2019. A non-resident decent would file a Form 706-NA, United States Estate Tax (and Generation-Skipping Transfer) Tax Return, where the US-situs property exceeds US$60,000.
If an estate has U.S.-situs assets and the executor of the estate is a non-U.S. person, a transfer certificate is required – basically a letter from the IRS confirming all U.S. taxes have been paid and providing permission to the U.S. holder of the assets to release the U.S.-situs property. You may do this by filing a U.S. estate tax return and submitting a letter to the IRS requesting it.
Got U.S. tax and Canadian tax compliance issues? Contact Cross-Border Financial Professional Corporation – When Perspectives Matter!
Karlene J. Mulraine, EA, CPA, CA, CPA (NH) is the President of Cross-Border Financial Professional Corporation. Follow us on Linkedin and Twitter, or hang out on Facebook.
The views expressed in this article are those of the author and should not be relied on to make decisions. Consider discussing your specific circumstances with an appropriate specialist.