All amounts in this article are in US dollars

Canada-U.S. Tax Treaty Article XXIX B Taxes Imposed by Reason of Death

A U.S. estate tax return must be filed if a deceased Canadian resident who is not an American citizen owned U.S.-situated assets exceeding $60,000 fair market value at death.  However, if the deceased made substantial lifetime gifts of U.S. property, a U.S. estate tax return may be required even if the U.S. assets do not exceed $60,000 at the time of death.  If your total worldwide estate in 2013 is less than $5.25 million US at the time of death (see below for what is included), you will likely not have to pay any US estate tax.  If the estate is passing to a spouse, a marital credit may also be available to reduce the tax payable.

For 2010 to 2012, with the passing of the US bill H.R.4853 — Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (pdf), the highest tax rate on estates was 35%, and no U.S. estate tax was payable in 2010 to 2012 if the total worldwide estate was $5 million or less, indexed for inflation after 2010.

With the passing of the American Taxpayer Relief Act of 2012 in January 2013, the estate tax on the taxable portion of the estate, if any, is 40%.  The exemption of $5 million for 2011 was made permanent, and is indexed for inflation, resulting in an exemption of $5.25 million in 2013.  See S. 2010 of the Internal Revenue Code.  However, the exemption is prorated for Canadians, based on the value of their US assets compared to worldwide assets.

The total worldwide estate includes:

proceeds of insurance on the deceased’s life, generally including proceeds receivable by beneficiaries other than the estate
full value of property the deceased owned at the time of death as a joint tenant with right of survivorship, unless the surviving spouse is a U.S. citizen, in which case only half of the value is included
property the deceased and a surviving spouse owned as community property
several kinds of transfers the deceased made before death
certain annuities to surviving beneficiaries
property in which the deceased either held a general power of appointment at the time of death, or used or released this power in certain ways before death

The deceased is subject to U.S. estate taxation on the fair market value of their U.S. assets at the time of death, including:

American real estate
tangible personal property in the U.S. (furniture, cars, boats, etc.)
stock of corporations organized in or under U.S. law, no matter where the stock certificates are physically located, even if they are registered in the name of a nominee (in street name)
certain debt obligations within the U.S.

U.S. stocks are not always subject to U.S. estate tax:  Canada – U.S. Tax Treaty

Canadians are protected by Article XXIX B (8) of the Canada – U.S. Tax Treaty which provides that:

If, at the time of death, the entire worldwide estate of a Canadian resident (other than a U.S. citizen) does not exceed $1.2 million US, the U.S. will only impose estate tax on property which, on disposal by the owner, any gain would have been subject to income taxation by the U.S.  This includes:

American real estate
personal property which is part of the business property of a permanent establishment or fixed base in the U.S.

This means that shares in U.S. corporations would not be subject to U.S. estate tax when the entire worldwide estate of the Canadian resident does not exceed $1.2 million US.

Are exchange-traded funds (ETFs) and American Depositary Receipts (ADRs) subject to US estate tax?

The U.S. Internal Revenue Code s. 2104 states that “shares of stock owned and held by a nonresident not a citizen of the United States shall be deemed property within the United States only if issued by a domestic corporation”.

IRS ruling letter 200243031 (pdf) indicates that American Depositary Receipts (ADRs) would not be subject to US estate tax when held by a non-resident of the US.

It appears that US ETFs trading on a US exchange would be considered US-situated assets, but Canadian ETFs holding US stocks would not be considered US-situated assets.  At this point, we’re not sure if this is only applicable to US ETFs holding US stocks, or would also apply to US ETFs holding foreign stocks.

Are US stocks in RRSPs subject to US estate tax?

When US stocks are held in an RRSP, RRIF, or other non-registered account which is considered a trust, they will be considered US-situated assets, and subject to US estate tax.  However, a Canadian mutual fund which holds US stocks would likely not be considered US-situated assets.  See the following excerpt from IRS Chief Counsel memorandum 201003013 (pdf) released January 22, 2010:

If the Canadian mutual funds held by Decedent’s RRSP are classified as corporations for U.S. tax purposes, the shares of the mutual funds would not constitute U.S. situs property under § 2104(a) and would not be includible in Decedent’s U.S. gross estate.  (The underlying assets also would be excluded from Decedent’s U.S. gross estate.)  You indicated that the RRSP held shares in several mutual funds that are organized as  trusts. However, a mutual fund may have been formed as a “trust” under Canadian law, but be properly classified as a corporation under U.S. law. Based on the information provided, it appears that all the Canadian mutual funds held by Decedent’s RRSP would be classified as corporations for U.S. tax purposes.

We’re still trying to confirm if all Canadian mutual funds are excluded from US-situated assets – i.e., to determine what causes them to be classified as corporations for U.S. tax purposes.

Are US stocks held in a Canadian corporation subject to US estate tax?

When US stocks are held in a Canadian corporation, they are considered property of the corporation, not personal property, so would not be subject to estate tax on the death of the shareholder.

 

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