Cross-Border Estate Planning for Americans and Dual Citizens in Canada

Video Script

In this video, I’m going to share with you 10 essential cross-border estate planning tips that will prevent costly mistakes.

When you’re a US Citizen living in Canada, estate planning is critical because you need to consider beneficiaries and assets in more than one country.

I’m Tiffany Woodfield, a Portfolio Manager and Cross-Border Financial Advisor. I help my clients in the US and Canada optimize their investments so they can live a work-optional lifestyle. Estate planning is an important part of your financial planning and retirement planning process, so let’s get into it!

There are three main reasons to do your estate planning correctly and to work with a professional:

1) If you want to make sure your loved ones get their full inheritance, then estate planning is critical.

2) If you don’t want the money in your estate to be tied up too long after you pass, then you need to do estate planning the right way.

30) If you don’t want the government taxing your estate excessively because you didn’t do the planning properly, then you need to have an excellent estate plan in place.

So who needs professional assistance to do estate planning?

In Canada, death is a major taxable event. For tax purposes, it is like you sold everything you owned the day before you died. For this reason, everyone needs to have some estate planning done.

In general, you should get professional advice so that you can use various strategies to minimize tax and prevent major headaches for your loved ones. Unless your estate is small, the cost of estate planning will always be worth it.

If you are a US person living in Canada, working with a professional team is imperative. There are many more pitfalls to watch out for if you have cross-border wealth or beneficiaries who live across the border.

Most estate planning strategies are complicated and require professional advice so this video aims to be general in nature.

In this video, I’m going to cover the following topics:

-Trusts

-IRAs

-Cash vs RRSPs or IRAs as Gifts

-Rollovers

-Creating Your Estate Planning Team

-Estate Freezes

-Charitable Donations on Death

-Using Capital Losses

-Elections

-Wills

And stay to the end when I answer some of the most common estate planning questions.

TRUSTS

First, trusts don’t work the same in the US and Canada, and this can put you at risk of double taxation.

The most common trap I find clients fall into is using a revocable living trust for estate planning. In the US, many people put their investments, home and other assets into a living trust. It is revocable, which means that the person who funded the trust can change the trust.

In the US, a revocable living trust is considered a “disregarded entity” by the IRS which means it is not taxed separately from the individual. You are considered the same person for tax purposes.

This isn’t the case in Canada, and is a major difference.

In Canada, a trust is a separate taxpayer. This means putting money into a trust or taking money out is usually a taxable event. (unless it qualifies as a rollover) As a US person living in Canada, if you keep things in a revocable living trust in the US, the foreign tax credits will most likely not match up, and you are at risk of double taxation.

You should speak to a cross-border lawyer if you have any non-resident trust or are the beneficiary of a non-resident trust.

IRAs

For an IRA, you have more options for qualifying beneficiaries who can stretch out the tax liability. This means you will want to carefully consider who you name as registered account beneficiaries and the tax implications.

GIFTS

When it comes to gifts, you need to consider that the gift of cash is much different than the gift of an RRSP or IRA because of the tax liability attached to the registered account.

For example, a gift of $500K cash is not the same as a gift of $500K in an RRSP

You will also want to understand if the estate will pay the tax on the registered account, if it will rollover, or if the beneficiary will be liable.

ROLLOVERS

People mistakenly think rollovers are automatic. But that isn’t the case. Using a rollover may be a tax planning opportunity. Although it always looks great to defer and rollover tax, there are times when you may want the tax included on the final tax return. This is something you would work out with your tax planning accountant.

YOUR TEAM

In general, I recommend putting together a team that will help you with wealth management and estate planning. I recommend working with a cross-border lawyer, cross-border accountant and cross-border financial advisor who can help advise on estate planning to minimize tax.

You may need to have an accountant who does your tax preparation and another accountant or tax lawyer who is familiar with estate planning to help you with these strategies.

You also may want to consider having a professional executor who understands the responsibility of executing your estate. Especially when you are a US person living in Canada.

ESTATE FREEZES

An example of an estate freeze is when you have a Canadian corporation, and you want to freeze the current growth of the company. You transfer the future increase in value of the assets in a corporation to other people, such as family members. The future growth is now taxed in the family members’ hands. You have essentially frozen your assets in the business. So the growth shares, usually common shares, will be held by the heirs of the business.

This means when you, as the owner, dies or there is a subsequent sale, the gain is only realized by you as the freezor or original owner of the previous value of the shares at the time of the freeze. So the tax bill will be less for the estate and/or you if you are still living at the time of sale.

This involves complicated planning with professionals but may be worth it as it can help you reduce taxes.

CHARITABLE GIVING

A tax credit lowers the tax you owe on your taxable income, so the more tax credits you have, the more you can reduce your income.

In the year of death, the amount of eligible gifts which can generate a donation tax credit on your return is increased from 75% to 100% of net income.

This increased limit is also available for the year immediately prior to death if there is tax remaining after claiming all the eligible gifts in the year of death.

You can also donate shares of publicly traded companies with large gains to a charity in kind and avoid capital gains tax. You will also receive a tax receipt for the full amount of the gift. Which is a great tax savings.

When the deceased passes away, net capital losses can be used to reduce income from any source, not just capital gains. This can be applied in the year of death and the immediately preceding year.

What this means is net capital losses can be used to lower your income and therefore reduce your tax bill. That is why it is important to do proper planning.

An election under the Income Tax Act is when you tell the government you are electing to have an alternative treatment of a taxable event. It gives you options and flexibility.

For example, normally, there is an automatic rollover to a spouse or common-law partner on death unless you elect out of it. There are cases where you may want to do this.

There are additional election options that may benefit your estate, so it’s worth speaking with an accountant about your options.

Most people understand the need to update their will when they move countries. This is very important. But what you may not realize is that estate laws vary between provinces. It is important to update your will for your province of residence.

If you don’t do this, your will could be invalid. It’s possible for someone to have a will and yet die intestate i.e. without a valid will, simply because their will was not for the correct province. That person’s estate would be distributed according to an established formula rather than according to their wishes.

Now, before we wrap this up, let me answer some common questions that come up when people are looking into cross-border estate planning:

How does a cross-border trust work?

A cross-border trust is designed to deal with the trust and tax issues that are unique to both Canada and the US. It helps to prevent the common problems of double taxation you may face with a domestic trust.

Are Canadian wills valid in the US?

Although Canadian wills are valid in the US, they may not comply with the laws of the foreign jurisdiction. The foreign tax laws likely differ from the Canadian tax law. So you will need to get professional advice about this and you may need to do a second will.

Is a US inheritance taxable in Canada?

There is no gift tax in Canada. As a resident of Canada, if you receive a gift or inheritance of any amount, you will not have to report this on your tax return. There are exceptions, such as if you receive a gift from an employer.

However, if you are a US citizen living in Canada, you will also have to consider the US rules. In the US, the rules are not as simple and you may be subject to gift tax, estate tax or inheritance tax depending on where you reside.

If you’re planning a move across the border or if you already live in Canada but have assets in Canada and the US, it’s important to get your estate organized and build a team of advisors to help you.