Subject: death tax on capital assets
Expert: taxman at centa.com
Date: Friday January 12, 2007
Time: 02:48 PM -0500
QUESTION:
we are canadian citizens living in california six months a year and have
property we paid$110,000 for and now likely worth $200,000.... no other
assets or income in the U.S. Upon the death of the last living spouse, what
would be the U.S. tax liability when property is liquidated? how do we best
protect our capital against paying U.S. tax ?
---------------------------------------------
david ingram replies:
Without more information about other assets in Canada, this can not be
answered because the US and the state of California use your world wide
assets to determine estate tax in the US.
The estate tax exemption for 2007, 2997 and 2008 is $2,000,000 going to
$3,500,000 in 2009 and supposedly unlimited in 2010. Then, it goes back to
$1,000,000 in 2011.
Clearly, the zero and back to $1,000,000 will likely be changed but with a
Democratic Congress and Senate now and the possibility of A Democrat
President in 2008, The estate tax exemptions are anybody's guess.
At the moment, If you sold it, you would owe about $18,000 US to the Federal
and California governments.
Canada would also tax it to about 20% (assuming your other income is in the
$70,000 range and would give you credit for one half of the Capital Gains
tax paid to the US.
The better news is that if a surviving spouse did pay estate tax to
California and the US, Canada would give credit for all of it on your
Canadian return against the Canadian Capital Gains tax which occurs on the
deemed disposal of the unit at death.
Obviously, just a generality but hopefully, you will get the idea.
----------------------------------------
The following is old (written in 1991) but will give you the idea. I guess
I should update it but to what amount??
I know that the exemption is going to $675,000 and maybe a million (we know
it is 2,500,000 for 2006, 2007 and 2008) I have used an old calculation
here. The total WORLDWIDE assets must be counted. Let's assume that the
total is $1,500,000. If the U.S. part of these assets was a $300,000 U.S.
condominium in Palm Springs, the estate exemption would be: $300,000
$1,500,000 x's $625,000 = $125,000
Estate tax would be payable on $175,000 U.S. ($300,000 - $125,000).
Gift tax rates (form 709) and estate tax rates (forms 706 or 706NA) are the
same once the exemption is passed.
The reason that the rates are the same is that any gifts made up to 3 years
before death are added back into the estate.
Gift tax is dangerous. Remember that the "payer," not the recipient (unless
the recipient is not available or broke after giving everything away), pays
the gift tax. The exemption for everybody is $10,000. If you have a spouse
who is a resident or a citizen of the U.S., you may give any amount to your
spouse. However!, if your spouse is a non-resident of the U.S., that gift
is limited to $100,000 U.S.
Therefore, if you are a Canadian and you decide to give the $100,000 summer
home in Bemidji, MN, or your Palm Springs, CA, condo, or your Cape Coral,
FL, condo to your 4 children, if you do not do it in "$10,000 each per
year" stages, you will have significant gift tax to pay. The same thing can
happen when you put your "new" non-resident spouse's name on the Palm
Springs condo when the value is over $200,000 or when you put your
children's names on your bank account in Canada if you happen to be a U.S.
citizen living in Canada. The following rates of gift and estate tax apply:
Column A Column B Column C Column D
Rates of Tax
Taxable Taxable Tax on on excess Amount
amount amount in over amount
excess
-- 10,000 ---- 18%
10,000 20,000 1,800 20%
20,000 40,000 3,800 22%
40,000 60,000 8,200 20%
60,000 80,000 13,000 26%
80,000 100,000 18,200 28%
100,000 150,000 23,800 30%
150,000 250,000 38,800 32%
250,000 500,000 70,800 34%
500,000 750,000 155,800 37%
750,000 1,000,000 248,300 39%
1,000,000 1,250,000 345,800 41%
1,250,000 1,500,000 448,300 43%
1,500,000 2,000,000 555,800 45%
2,000,000 2,500,000 780,800 49%
2,500,000 3,000,000 1,025,800 53%
3,000,000 10,000,000 1,290,800 55%
10,000,000 21,040,000 5,140,800 60%
21,040,000 ---- 11,764,800 55%
If this sounds like I am only talking about having a house in Palm Springs,
Cape Coral, or Phoenix, be assured, it doesn't stop there. It also applies
to shareholdings of U.S. companies. If you own U.S. securities or stock
(which have to go through a U.S. transfer agent to be sold or transferred),
you are also in trouble. The same rules and rates apply even if you have
never been to the U.S. and the stock is in a safety deposit box in Regina,
or your broker is holding it for you in St John's, Newfoundland.
If your only U.S. asset is less than $1,250,000 U.S. stock there is a
special exemption in the new treaty. There would not be any U.S. estate tax
in this case. However, if you owned $100,000 worth of U.S. stock located in
Canada and a $100,000 condominium in the U.S., you would have to file a
706NA estate tax return plus a state return if the property was in a state
with an estate tax.
Right now, we are having trouble getting stocks released from two transfer
agents in the U.S. because they want an estate tax clearance from the IRS.
If that isn't confusing enough so far, on the other hand, "money on deposit
in a U.S. bank or Savings and Loan or Insurance Company does not count for
U.S. estate tax if it is `not effectively connected with conducting a trade
or business within the U.S." This means that if you died leaving a
$1,460,000 deposit in the Bank of America, there would be no tax on the
interest or any estate tax on the capital. But if you died owning $1,460,000
worth of shares of the Bank of America and the shares were in your wall safe
at home in Horseshoe Bay, Saskatoon, Halifax, or Sudbury, you would owe tax
on the dividends (to the U.S. and Canada) and estate tax to the Federal U.S.
government (no state tax as it is not situated in a state).
What is the reason for this? Back in the oil problem days, the U.S. Congress
had to recognize that if they taxed non-resident/non-citizen bank deposits,
tens of billions of dollars would be pulled out of Chase Manhattan,
CitiBank, Bank of America and so on. To keep that money there and stop their
banking system from collapsing, they passed legislation which exempted
foreign owned bank accounts from U.S. tax if they were deposit accounts only
and not effectively connected with conducting a business within the U.S. The
only requirement was that the holder have a U.S. `taxpayer identifying
number' and report to the bank/savings and loan that he/she is still a
non-resident/non-citizen at least once every three years. If the situation
changes he/she is to notify the institution within thirty days.
Money on deposit in the U.S. is not subject to U.S. income tax or estate tax
provided it is not effectively connected with a U.S. Trade or Business
(remember, the interest IS subject to Canadian Tax so report it on your
Canadian return). If the money is on deposit to fund your rental house in
the states, the interest IS taxable on your U.S. federal income tax return
because a rental house is generally considered to be effectively connected
with a U.S. business. This is an automatic election which you make when you
file your 1040NR and claim expenses against the rent. If the rental house
was not effectively connected with a U.S. business, the U.S. federal income
tax would be a 30% of the GROSS rents with no expenses allowed.
=============================
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