Tax Insights: Estate tax update – US estate tax exposure for Canadians (2018 edition)

Issue 2018-03

In brief

Canadian residents (who are not US citizens) may be subject to US estate tax if they die owning certain US assets, such as shares of US corporations, US real estate and US business assets.

US tax reform: On December 22, 2017, President Donald Trump signed into law the Tax Cuts and Jobs Act (TCJA). The changes include doubling the federal estate and gift tax exemption amounts from $5.6 million to $11.2 million¹ for 2018 (to be indexed annually). The increase is effective for 2018 through 2025. Unless permanent legislation is enacted, the exemption will return to the pre-2018 regime in 2026. 

All amounts in this Tax Insights are in US dollars. 

In detail

If your US assets are $60,000 or less 

If the value of your US assets are $60,000 or less, you are not subject to US estate tax and your estate does not need to file a US estate tax return. 

If your US assets exceed $60,000 and your worldwide estate exceeds $11.2 million

If the value of your worldwide assets exceeds $11.2 million, you may be required to pay US estate tax based on the value of your US assets. The tax rate starts at 18% and increases to 40% for US assets exceeding $1 million. 

Fortunately, Canada’s tax treaty with the United States provides some relief for Canadians. It allows you to reduce your estate tax liability by claiming a tax credit equal to the greater of:

• $13,000
• $4,425,800² x the value of your US assets ÷ value of your worldwide assets

For example, if your US stock portfolio accounts for 10% of the value of your worldwide assets, you will be entitled to a credit of $442,580 ($4,425,800 x 10%).

US estate tax rates and credits 

The credits

For example, David, a Canadian resident (who is not a US citizen), owns a US stock portfolio worth $1.5 million. His entire estate is valued at $15 million.

As shown in the table, if David dies in 2018, his estate can claim a unified credit equal to $442,580 (10% of $4,425,800), reducing his estate tax liability to $103,220.

In addition to the unified credit, the tax treaty provides a marital credit if the US assets pass to a spouse on death. The marital credit equals the lesser of the unified credit and the amount of the estate tax.

If David were to leave the US stock portfolio to his wife Kylie, also a Canadian resident (who is not a US citizen), his US estate tax liability would be completely eliminated.

If your US assets exceed $60,000 and your worldwide estate does not exceed $11.2 million

Because of the prorated unified credit provided under the tax treaty, you will not be subject to US estate tax if the value of your worldwide estate does not exceed $11.2 million. However, your estate will be required to file a US estate tax return to claim the treaty credits. 

US estate tax is often greater than Canadian tax

On death, a taxpayer will pay Canadian tax on any accrued gain on the US asset and will also be subject to US estate tax on the full value of the asset. Canada will allow a foreign tax credit for US estate tax paid on the US assets. In the end, an individual generally pays the higher of the two taxes.

Because Canadian capital gains rates are significantly lower than the top US estate tax rate, the individual likely will pay tax at the US estate tax rate. 

In addition, the provinces and territories generally do not allow a foreign tax credit for US estate tax paid. As a result, the deceased may be subject to some double taxation.

When do you have to file an estate tax return?

If your US assets exceed $60,000, even if no US estate tax is due, you may still be required to file a US estate tax return along with a statement claiming the benefits provided under the tax treaty. In many instances, the transfer agents will not agree to the transfer of US investments until the estate can provide proof of clearance from the Internal Revenue Service. 

The filing deadline for a US estate tax return is nine months after the date of death. 

^{[1.] The American Taxpayer Relief Act of 2012 establishes an exemption amount of $5 million and indexes this amount for inflation annually. The Internal Revenue Service (IRS) announced that the indexed exemption amount is $5.6 million for 2018. The Tax Cuts and Jobs Act has doubled the original exemption amount from $5 million to $10 million, indexed to $11.2 million for 2018.}

^{[2.]  $4,425,800 is the US estate tax on $11.2 million of assets.}