In this segment for Investment Executive, Terry Ritchie talks about U.S. estate planning issues for Canadians with property in the U.S. Recent estate property tax changes in the U.S. have relieved the burden for many Canadians of what happens upon their death when they own U.S. property. If a Canadian owns property with a worldwide value of less than $5.25 million (USD), then the applications of credits may resolve any U.S. estate tax issues.

Those owning property (including U.S. shares) may still be subject to U.S. estate tax, but exemptions do help. An executor would need to file a U.S. estate tax return, and the worldwide estate is part of that filing. If Canadians don’t want the IRS involved upon death, they may benefit from alternative strategies such as partnerships or trusts.

For U.S. citizens living in Canada, estate tax exemptions are much higher now at $5.25 million, which will rise with inflation. If an American in Canada is married, that couple can double up on the exemption. In summary, the estate tax has not gone away completely, but the number of those affected by it has diminished dramatically.

It’s also important to consider the income tax, estate tax, and health care implications of these measures. Consider the rules that relate to establishing U.S. tax residency, such as the Substantial Presence Test. Under this test, snowbirds who spend more than 183 days in the U.S. over a three-year-period are subject to U.S. income tax on their worldwide income. Those that meet this test can file IRS Form 8840 so they aren’t subject to U.S. tax, but U.S. tax residents must file IRS compliance forms when they own Canadian companies, bank accounts, investments, and retirement accounts or risk substantial penalties. The article also discusses rules for Canadian mutual funds, RRSPs, RRIFs, and new foreign asset reporting requirements.

What are the implications for U.S. estate taxes? Under the new rules, a Canadian could be subject to U.S. estate taxes on his worldwide estate, including all assets in Canada. The article provides a recent estate tax case to illustrate this. In terms of health care coverage, Canadians who are away from their province of residency for more than 182 days (some provinces vary) may lose coverage, and finding an alternative form may be challenging.

Read the full article here.

As always, we understand that U.S. Canadian Cross-Border issues can be be a challenge to understand, we are here to answer any cross-border wealth management questions you may have.

With a wealth management career spanning 25 years, Ritchie brings substantial experience in the areas of financial, investment, tax and estate planning. Ritchie specializes in assisting affluent individuals and families with their Canada-U.S. cross-border financial planning complexities.

“Terry brings a very specialized set of skills to our firm,” said James Sheldon, CEO of Cardinal Point. “There are very few individuals in our industry with his cross-border financial planning knowledge and experience.”

At Cardinal Point, Ritchie will lead the Canada-U.S. cross-border wealth services division, which focuses on providing clients with comprehensive cross-border investment, financial, tax and estate planning and transition planning solutions. Prior to joining Cardinal Point, Ritchie owned and operated his own cross-border financial planning and tax practice.

“Ritchie’s ability to address the most sophisticated cross-border wealth management complexities is what separates him from a traditional, domestically-based financial planner,” adds Sheldon. “With the addition of Ritchie, our cross-border clientele will gain access to a thought leader whose advice has assisted generations of cross-border families over the years.”

Ritchie is a Registered Financial Planner (RFP) in Canada, enrolled to practice before the U.S. Internal Revenue Service (IRS) as an Enrolled Agent (EA). He is also a Trust and Estate Practitioner (TEP) affiliated with the Society of Trust and Estate Practitioners (STEP). He graduated with a Bachelor of Science in Finance from Arizona State University. He is active as an author, speaker and educator on international financial, tax and estate planning matters.

In this video segment, Terry Ritchie, cross-border tax and estate planning expert, discusses how a new measure in the Patient Protection and Affordable Care Act, also known as “Obamacare,” could result in a surprise for U.S. citizens living in Canada. Effective for 2013, a 3.8% surtax will be imposed on passive income such as interest, dividends, rental property, and capital gains.

As Ritchie points out, the challenge is that foreign tax credits will likely not offset the 3.8% Obamacare tax on net investment income. This means that individuals earning more than $125K and couples earning more than $250K may be taxed on passive income for the first time in 2013. Ritchie asserts that there are no clear options to avoid or minimize the surtax at the moment, so advisors are wise to make their clients aware of this measure.

Budget 2013 also proposes to lengthen the CRA’s reassessment period beyond three years if: 1. The taxpayer has failed to report income from a specified foreign property on their income tax return, and 2. The form was not filed on time by the taxpayer, or a specified foreign property was not identified, or was improperly identified on the form.

The CRA will remind taxpayers of the obligation to file Form T1135 on their Notices of Assessment, if they indicated on their income tax returns that they have specified foreign property in the taxation year with a total cost of more than $100,000. Even if taxpayers don’t make money from their foreign rental property, they should still report it.

What to do? After other advisors told the couple to liquidate their Canadian retirement accounts and transfer those assets to U.S. accounts, the couple turned to the cross-border expertise of Cardinal Point. Jeff was concerned that such a move would subject those assets to double taxation, first as a withholding tax in Canada and then again as taxed income in the U.S. Fortunately, he came up with a solution that enabled the couple to avoid being taxed twice while still receiving funds from their tax-deferred Canadian retirement accounts.

Then Jeff identified a significant issue with their estate plan. “[T]he husband’s estate was considerably larger than his wife’s. That ordinarily wouldn’t be an issue, but the wife isn’t a U.S. citizen and isn’t eligible for the unlimited marital exemption.” As a result, the wife would owe estate taxes on what she inherited from her husband. To prevent this, Jeff employed two strategies to help ensure she wouldn’t owe estate taxes on that money.

As with many cross-border moves, there were no “one size fits all” solutions to fit the couple’s complex financial, tax and estate planning needs. It wasn’t a quick fix, but our tailored advice helped the couple worry less about their retirement and enjoy more Florida sunsets.