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A tale of two countries

A tale of two countries

A spotlight on some of the differences in Canadian and American gift and estate tax laws.

Illustration of a woman holding a large coin.

We may be close neighbours with a lot in common, but when it comes to tax laws related to gifts and estates, Canada and the United States are surprisingly far apart.

Perhaps the biggest difference is that, unlike Canada, the U.S. imposes a transfer tax on gifts made during your lifetime and an estate tax on all bequests. The estate tax — which ranges from 18% to a high of 40% — applies to estates or gifts above USD$11.7 million for individuals and USD $23.4 million for married couples. With Democrats currently controlling both the legislative and the executive branches of the U.S. government, there is speculation that the exemption level could drop to $5 million or even $3.5 million, where it was when President Barack Obama took office. The current level, which was set in the 2017 tax overhaul, is expected to sunset in 2025.

What does all of this mean to you? 

If you’re a Canadian with ties to the U.S., an American living in Canada, or a Canadian acting as executor for an estate with ties to the U.S., it means that there are several things to consider with respect to estate planning. Reviewing your situation with an advisor could help you maximize the effectiveness of
your planning.

For Americans residents of Canada

Americans living in Canada are still subject to the U.S. estate and gift tax. Gift tax is imposed on gifts of tangible property and on gifts of real estate in the U.S. (Gifts of shares in a U.S. corporation are not subject to the gift tax, although a bequest of U.S. shares — whether publicly traded or not — is subject to estate tax.) Real estate and debt obligations of Americans are also subject to estate tax if they are above the exemption allowed under the Canada-U.S. tax treaty.

Executorship

If you’re the executor of an estate in Canada, don’t forget to inquire about the deceased’s parents’ country of birth. A person whose parents spent their formative years in the U.S. is generally a U.S. citizen. Executors who fail to acknowledge their obligation to the Internal Revenue Service will be held personally liable for taxes if the estate is over the exemption threshold. This could result in a significant liability, and you could be personally liable for income taxes and information returns not filed during the deceased’s lifetime. Fortunately there are ways to manage this dilemma, including the American equivalent of the Canadian voluntary disclosure program available to Americans.

Domicile - It's not always straightforward

If you intend to move to the U.S. permanently and you spend any amount of time there, the U.S. is now your domicile.

Canadians tend to know that they should not spend more than 120 days per consecutive calendar year in the U.S. so as not be deemed a U.S. resident for income tax purposes under the substantial presence test. Canadians who meet the substantial presence test must file a Closer Connection Form to refute tax residency in the U.S. for income tax purposes. The Closer Connection Form is the tie breaker test that determines whether you are more closely bound to Canada or the U.S.

Canadians are often less aware of the punitive domicile rules under the Internal Revenue Code where a Canadian with a domicile in the U.S. will be subject to the U.S. estate and gift taxes, similar to a U.S. citizen. U.S. citizens and domiciliaries are not subject to the estate tax or gift tax if the estate is bequeathed or a gift is made to a U.S. citizen spouse or a U.S. domiciled spouse. 

Making a charitable gift to reduce gift and estate taxes

Whether you’re a U.S. citizen or a U.S. domiciliary, you can reduce your gift and estate tax liabilities by taking a deduction for contributions to a charity.

Queen’s alumni and their families can make donations or bequests directly to the university and use the Queen’s charitable receipt for your U.S. income tax returns under the Canada-United States Income Tax Convention.

Friends of Queen’s who are American residents but not alumni or related to an alumnus can make a donation - with tax advantages - through the U.S. Foundation for Queen’s University at Kingston, which is a 501©(3) tax-exempt organization recognized under the U.S. Internal Revenue Code. In addition, alumni making a gift from a registered fund, corporation, foundation or trust who are U.S. residents should also direct donations to the U.S. Foundation for Queen’s University at Kingston.

Sunita Doobay

Sunita, Law'92, is a Partner at Blaney McMurtry LLP and tax expert who advises closely held companies, funds, and individual clients on a broad range of tax matters including cross-border structuring and succession planning. She is also an adjunct professor at Queen's Law School and a member of the Gift Planning Advisory Committee. 

Readers are cautioned to consult their own professional advisers to determine the applicability of information and opinions in any particular circumstances. The Queen's Gift Planning office produces a separate newsletter with charitable giving information specific to U.S. residents twice annually. If you wish to join this mailing list, please let us know.

graphic of cover of Queen's Alumni Review, issue 2, 2021