If you’re a retiring or retired physician who spends part or all of the winter in the United States every year, you’re among the more than a million Canadian snowbirds who make the trek.
The attraction of milder temperatures, golf courses and an often close-knit snowbird community is driving increasing numbers of Canadians to consider purchasing a home in the U.S., with Florida and Arizona being two of the most popular destinations.
There are many benefits to owning property in the U.S., but keep in mind that U.S. estate tax could apply to you — even if you’re a Canadian and not a U.S. citizen.
Estate tax for Canadians who own U.S. property
In Canada, there are no estate or inheritance taxes on your assets. But when you pass away, you are deemed to have sold or transferred your assets, and your estate is taxed on any gains. (That said, there are estate planning strategies to help minimize the taxes.)
If you are a Canadian who owns property in the U.S., however, estate tax could be levied on your U.S. assets when you pass away, depending on the total value of your worldwide assets (in the U.S. and globally).
Take a look at this flow chart to see whether your estate would need to pay U.S. estate tax (based on the tax exemption rate in 2019).
- Figure out how much you have in U.S. assets.
- Is it more or less than US$60,000?
- US$60,000 or less in U.S. assets: your executor doesn’t need to file a U.S. estate tax return and there is no U.S. estate tax to pay.
- More than US$60,000 in U.S. assets: your executor needs to file a U.S. estate tax return.
- If you have more than US$60,000 in U.S. assets, what are your worldwide assets?
- Less than US$11.4 million (in 2019): your estate should not have to pay U.S. estate tax
- US$11.4 million or more: your estate might owe U.S. estate tax but the tax credits available under the Canada–U.S. tax treaty could reduce the amount.
If your U.S. assets are more than US$60,000 and your worldwide assets are more than US$11.4 million (in 2019 — the amount rises annually with inflation), the U.S. estate tax levied is based on a graduated scale, rising from an initial 18% up to 40% for the value of the property above US$1 million.
This can be a significant burden on your heirs, and one that will be particularly unwelcome at a time when they will no doubt be dealing with many complex issues surrounding the death of a loved one.
Owners need to stay abreast of changing tax rules
The Canadian and U.S. tax codes are constantly evolving, and this can have significant implications for current and prospective owners of U.S. property. The exemption for Canadians started at $11.2 million in 2018 and is indexed to inflation. If no new legislation is passed, this exemption will expire in 2025, when it will revert to $5.6 million. Be sure your tax accountant is well versed in U.S. estate tax, as failure to comply could result in costly errors.
From identifying the most tax-efficient ownership structure, to coordinating with local U.S. agents, banks and lawyers, a trusted professional can be an invaluable resource.
Contact your MD Advisor* to find out how to take the first steps towards optimizing your U.S. property purchase.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.