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US Estate Tax for Canadians and Other Cross Border Tax Issues

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Presented to the Estate Planning Council of Abbotsford by Benita Loughlin, CA, Partner Tax KPMG LLP on June 19, 2013

Presented to the Estate Planning Council of Abbotsford by Benita Loughlin, CA, Partner Tax KPMG LLP on June 19, 2013

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  • 1. US Estate Tax for Canadians and Other Cross-Border Tax Issues Estate Planning Council of Abbotsford June 19, 2013 Benita Loughlin, KPMG LLP
  • 2. © 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Restrictions and Limitations 1 ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Any advice herein is based on the facts provided to us and on current tax law including judicial and administrative interpretation. Tax law is subject to continual change, at times on a retroactive basis and may result in incremental taxes, interest, or penalties. Should the facts provided to us be incorrect or incomplete or should the law or its interpretation change, our advice may be inappropriate. We are not responsible for updating our advice for changes in law or interpretation after the date hereof. KPMG’s advice is for the sole use of KPMG’s client. The advice is based on the specific facts and circumstances and the scope of KPMG’s engagement and is not intended to be relied upon by any other person. KPMG disclaims any responsibility or liability for any reliance that any person other than the client may place on this advice.
  • 3. © 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 2 US Vacation Property  Estate tax is the biggest concern Canadians have  No US estate tax if worldwide assets US$5,250,000 or less (because of Canada-US Treaty credit)  If married, worldwide assets of first to die can be about US$10,000,000 without estate tax applying (because of Canada-US Treaty marital credit) if property transferred to surviving spouse (no estate tax if surviving spouse is a US citizen)  Maximum rate is 40%  US estate tax on first $1,000,000 is $345,800; any excess value is taxed at 40%  The lifetime exemption amount for US citizens is $5,250,000 which is equivalent to $2,045,800 of estate tax (the applicable credit amount)  Canadians are allowed a pro-rata portion of the exemption amount based on US assets divided by worldwide assets
  • 4. © 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 3 Example #1  Michael has worldwide assets valued at $7,000,000  Vacation home in US valued at $2,000,000  Shares of Apple valued at $1,000,000 Estate Tax on $3,000,000 On first $1,000,000 $ 345,800 On $2,000,000 at 40% 800,000 Total estate tax before credits 1,145,800 Treaty credit is 3/7 x $2,045,800 < 876,771 > Net estate tax payable $ 269,029  If married an additional $876,771 credit available (or $269,029 in this example)  If not married or transfer property to children then estate tax will be payable because worldwide assets > $5,250,000  If married and property to spouse then no estate tax because worldwide assets < $10,000,000  In many cases surviving spouse will sell before death
  • 5. © 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 4 Example #2  George owns a home in Arizona valued at $4,000,000  George has worldwide assets valued at $20,000,000  George dies and leaves his assets to his spouse, Gina Estate Tax on George’s Death On first $1,000,000 $ 345,800 On $3,000,000 at 40% 1,200,000 Total estate tax before credits 1,545,800 Treaty credit is 4/20 x $2,045,800 < 409,160 > Treaty Marital Credit < 409,160> Net estate tax payable $727,480
  • 6. © 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 5 Alternatives to Minimize or Eliminate US Estate Tax Exposure  Play the odds  Spouse with lower worldwide assets buys US assets (with own funds)  Joint ownership (each with own funds)  Sell after first to die  Canadian company (if mostly rental)  Non-recourse debt (never actually use)  Life insurance  Donation to US charity  Canadian Trust (properly structured)  Canadian Limited Partnership (with US check-the-box election)  Minimize assets of surviving spouse with spouse trust (with no general power of appointment)  Transfer US property to trust for surviving spouse (with no general power of appointment); structure to qualify for treaty marital credit
  • 7. © 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 6 Canadian Trust for US Vacation Property  Establish trust before looking for property  One spouse is the settlor  The other spouse is the life beneficiary  The settlor is neither a beneficiary nor a trustee  The trust is settled with cash  Children are the remainder beneficiaries  Pay rent after beneficiary spouse dies  Individual capital gains rate on gain  Can avoid 21-year rule if structure as spouse trust  Settlor has to part with the cash  Need to be married  No US estate tax
  • 8. © 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 7 Canadian Limited Partnership for US Vacation Property  Elect to treat partnership as corporation for US tax purposes (check-the-box election)  Avoids US estate tax (property is owned by Canadian corporation for US tax purposes)  No shareholder benefit rules because partnership for Canadian tax purposes  Need some type of “business” in the partnership (e.g., stock portfolio, LP interests or rental income)  Corporate tax rate on capital gains realized  Can transfer property already owned to the Canadian limited partnership but preference is to set up before purchase
  • 9. © 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 8 US Citizens Resident in Canada  Born in the US = US citizen  Can renounce US citizenship  Possible retroactive determination of loss of citizenship (depends on facts)  Subject to US income tax, estate tax, gift tax and generation skipping transfer tax on worldwide income/assets  File US tax returns, all related forms and foreign bank account reporting forms  Estate planning should take into account US citizenship
  • 10. © 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 9 Renouncing US Citizenship  Need appointment at consulate (need prior legal advice)  Deemed disposition of assets at fair market value  Immediate recognition of certain deferred compensation/pension amounts (including stock options, RRSP and non-US pensions)  $668,000 tax-free capital gains (not for deferred compensation/pensions)  US heirs subject to US estate and gift tax (forever)  Exception if: < $2,000,000 net worth; and Filed last 5 years of tax returns; and Average annual US tax liability less than $155,000  Exception if: Dual from birth; and Reside in the other country; and Not US resident in 10 of the last 15 years  Exception if: Under age 18½
  • 11. © 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 10 Renouncing US Citizenship - Planning  Use $5,250,000 exemption to reduce net worth below $2,000,000  Check dual from birth exception  Check amount of gains  Match timing of US and Canadian tax (e.g. withdraw RRSP, exercise stock options, reorganization of corporate structure)  Retroactive determination of loss of citizenship  Deal with children before age 18½
  • 12. © 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 11 US Citizen with Residence with Accrued Gain  In Canada can use principal residence exemption for main home or vacation home (not rental property)  Gain in excess of $250,000 taxable in US  Use lifetime gift tax exemption amount to transfer house with accrued gain to non-US citizen spouse before sale  Current long term capital gains tax rate 20% in US; Canada is nil  Structure will so house not bequeathed to US citizen spouse
  • 13. © 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 12 US Citizen Estate Planning  Reduce worldwide assets  Do not increase worldwide assets  Estate freeze results in gift for US tax purposes Preferred shares deemed to have zero value unless fixed cumulative dividend  Use annual gift tax exemptions $14,000 to anyone $143,000 to non-resident alien spouse  Pay tuition and medical expenses directly  Establish trust in will of non-US spouse so that assets not included in estate of US surviving spouse No general power of appointment Spouse can’t be sole trustee with unlimited capital encroachment powers  Establish trust in will of US spouse (up to exemption amount) so that assets not included in estate of US surviving spouse; keep increase in value out of US estate tax  Use $5,250,000 lifetime gift tax exemption amount for assets that will increase in value
  • 14. © 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 13 Canadian Trusts with US Beneficiaries  All income retained in trust is taxable to a US beneficiary when eventually distributed  For US purposes cannot designate a distribution as a distribution of capital  For US purposes current year income is distributed first, then accumulated income and finally capital  Even if the beneficiary is only a capital beneficiary (trust law vs. tax law)  Any accumulation distribution is treated as having been made over the term the trust existed  US tax is calculated on the amount allocated to each year as if it was earned in that year
  • 15. © 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 14 Accumulation Distribution Example  Trust created 10 years ago with $1  Trust earned $10,000/year of dividend income  Trust paid Canadian tax of $2500/year  Distribution of $75,000 in Year 11 US beneficiary reports $ 75,000 Gross-up for tax paid by trust 25,000 Income reported on US return $100,000 US tax calculation $ 35,000 Foreign tax credit 25,000 Net US tax owing $ 10,000  Interest is charged on $1000/year of US tax for 10 years, 9 years, 8 years etc…in some cases the US tax plus interest is more than the distribution
  • 16. © 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 15 How to Deal with Potential US Beneficiaries of Canadian Trusts  Do not include any US beneficiaries  Do not make distributions to US beneficiaries  Provide in trust that US beneficiaries not entitled to any distributions  Distribute all trust income including capital gains every year  Distribute all trust income including capital gains before beneficiary moves to the US  Distribute all income including capital gains to Canadian beneficiaries in Year 1 and then distribute to US beneficiaries in Year 2  Careful bookkeeping (tracking trust income and taxes paid each year) – in many cases enough Canadian tax was paid to eliminate US tax  If records not available use “default method” to determine accumulation distribution – can improve result by making distributions over several years
  • 17. © 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 16 Provide Flexibility in Trusts  Trust can move to another jurisdiction (i.e. to US if US beneficiaries)  Trust can be split if some beneficiaries are in the US  If US is a possibility provide that a court within the US is able to exercise primary supervision over the administration of the trust if trust to become US resident (need to meet court and control test to be considered a US resident trust)  For 21-year rule (in order to have Canadian resident beneficiary): Distributions can be made to entity wholly owned by beneficiary Beneficiary can transfer interest in trust to wholly owned entity Create the entity (ULC) and make it one of the beneficiaries
  • 18. © 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 17 Alter Ego Trusts  Do not use for US assets  Canadian tax on death payable by trust  US estate tax payable by settlor  No offsetting credits in Canada because different taxpayers  US will allow credit for Canadian tax on Canadian assets  Ok to use if no estate tax payable
  • 19. © 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 18 Holding Companies  US citizens do not benefit from holding companies  US anti-deferral rules similar to FAPI  No integration in US  Consider ULC  Restructure before death if US heir  Restructure in estate if US heir (foreign estates are subject to less onerous US rules than trusts)
  • 20. © 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 19 Delinquent US Filers  Need to deal with the issue  The issue won’t go away  Fix it and then renounce if don’t want to be a US citizen  IRS streamlined process simpler/less costly than Offshore Voluntary Disclosure Initiative
  • 21. © 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 20 Greencard Holders  Greencard holder = US resident  Even if greencard no longer valid for immigration  Required to file US tax returns  Expatriation rules apply if greencard held in 8 or more of the last 15 years at time of surrender  Tie-break to Canada using treaty, surrender greencard at border or greencard confiscated = expatriation  Deemed disposition of assets/recognition of pension value – same as US citizens renouncing  Nexus application will identify greencard holder
  • 22. © 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 21 Summary  Determine US estate tax exposure  Ask about US citizenship  Ask about greencards  Ask about US residents in family  Lots of opportunities to plan for tax minimization but opportunities are better before death, expatriation, freeze, distribution, reorganization etc
  • 23. Questions?
  • 24. Thank You Presentation by Benita Loughlin KPMG LLP benitaloughlin@kpmg.ca
  • 25. © 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in Canada The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International Cooperative (KPMG International).