Often we get asked about tax implications for Canadians to own property in the Greater Phoenix Real Estate area. While we have already discussed property tax for Canadians in a separate article in this website as well as prior discussed potential income tax implications for Canadians ( such as rental income in the US) , the focus of this article is on Estate Tax.
Estate tax is a foreign word for us Canadians as we don’t effectively really have one in Canada since the Trudeau government repealed inheritance tax in 1972. While Canadians are over-taxed on many things, the government doesn’t tax us on our assets when we die. The Americans do.
While it is always a good idea to consult a tax accountant and/or tax attorney with cross-border experience to assess your own personal situation, this article will brief you on the current estate tax. It can give you a general idea as to where you would stand if you are to pass away while owning US assets.
In 2010 there was a tax exemption for assets of up to $5 million. It was indexed for inflation after 2010 so in 2012 it was $5.12 million. For US residents, tax on the estate is arrived at by calculating tax payable with rates ranging from 18%-35%, dependent upon the amount of the estate, and then subtracting off the unified credit. In 2010, the unified credit for US residents was $1,730,800 which exempts the tax on a $5 million estate.
The unified tax credit for Canadians is prorated based on the ratio of US assets to our total worldwide assets. So if you have an estate valued at 5 million dollars with US assets totaling $500000, then the credit would be calculated like this…$1,730,800 x ($500,000/$5,000,000) = $173,080 unified credit. In this example, the tax payable on $500,000 would have been $155,800. So after subtracting the unified credit of $173,080, tax would be $0. For many of us this calculation means $0 payable.
Unless legislation was enacted by December 31, 2012 then estate tax would revert to 2002 levels which would reduce the 5 million dollar exemption down to 1 million and increase the maximum tax rate to 55%. Some of our clients were reacting to this potential change through estate planning by transferring title over to their children, or setting up a cross-border trust, while others simply by buying term life insurance for a small monthly payment to match what they perceived their tax implications could be.
Americans generally don’t like estate tax either. Recognized as being important to taxpayers, lawmakers proposed estate tax changes in The American Taxpayer Relief Act of 2012. Congress passed this bill on Jan 1, 2013. President Obama then signed it into law.
The $5+ million exemption carries on… hurray!! And it is indexed for inflation. Rates prior to the exemption are from 18%-40%.
So here is another example: Let’s say you own $300000 of US assets (which could include house, car, furniture and any shares in US stocks of corporations organized in or under US law). And let’s also say that you have worldwide assets that total $5 million. Making a long story short….you get a unified credit of $103,848 resulting in $o tax payable.
There wouldn’t be any tax payable until you would have worldwide assets of over $5.5 million with $600,000 in US assets and then your tax owing, after the unified credit of $188,815 is subtracted off, would be $1985.
(The above examples are the simplified versions based on 2013 rates and don’t take into account any potential deductions to arrive at the net estate amount nor other potential tax credits.)
passed in 2017 doubles this exemption. For the 2021 tax year, the exemption is 11.7 million. The exemption is $12 .06 million in 2022 and $12.92 million for 2023.
This is good news for Canadians and Americans !! However, The Lavine Team always recommends that you talk to an accountant and/or tax attorney to determine how you should hold title to your property, the impact of US assets to your estate & other financial concerns.
Please do have a look at other information for Canadians about buying homes in the Greater Phoenix Real Estate area under The Buying Process section tab on our main website www.albertatophoenix.com
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