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How U.S. Estate Tax Applies to Canadians with U.S. Stocks, ETFs

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Cardinal Point’s Terry Ritchie continues his talk with Rob Carrick about U.S. estate taxes; this segment focuses on what they mean to Canadians who own U.S. stocks and ETFs. U.S. shares owned by Canadians are considered U.S. cited, and there could be U.S. estate tax filing requirements if they are valued at more than $60K (USD) upon death. If that’s the case, a U.S. estate tax return, IRS Form 706 NA, should be filed. The problem is that the full value of the worldwide estate must be disclosed, even though the Canadian is responsible to the CRA, not the IRS. Otherwise, some transfer agents may not distribute those U.S. shares through probate.

Ritchie then discusses how much money Canadians would need in estate to worry about estate taxes. If the Canadian has less then the $5.25M exemption ($10.5 for married couples), then there is no U.S. estate tax exposure. It’s a matter of filling paperwork, but not owing taxes.

What if a Canadian owns American stock indexes listed on the TSX? It’s not an issue, but if you buy the comparable version from a U.S. provider traded on a U.S. exchange, those are considered U.S.-cited and would be part of a U.S. estate tax valuation.

What Snowbirds Need to Know about U.S. Estate Tax

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Cardinal Point’s Terry F. Ritchie talks to Rob Carrick about the latest changes in U.S. estate taxes and what they mean for Canadian snowbirds who own property in the U.S. For many years, snowbirds had to worry about U.S. estate taxes, but it’s not an issue for most anymore, as the threshold is much higher ($5.23 million USD each). A married couple with a worldwide estate valued at less than $10.5M would have no U.S. tax exposure. According to Ritchie, the estate tax exemption will continue to rise with inflation. For most Canadians, these changes are good news, as estate taxes are not the big concern they once were.The other issue to be aware of is the need to file a U.S. estate tax return upon death if the Canadian has property worth more than $60K.

To view the video, click here to visit the Globe and Mail website.

How US PFIC Rules Can Impact Your Clients

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Cardinal Point’s Terry Ritchie discusses the impact of U.S. PFIC (Passive Foreign Investment Company) tax rules on U.S. citizens living in Canada who hold Canadian mutual funds or ETFs. The challenge is that under U.S. tax law, the earnings and dividends from these PFICs are not taxed the same way in the U.S. as they are in Canada, resulting in very high tax rates.

The PFIC rules require the filing of Form 8621 for each PFIC owned. The taxpayer can make one of two elections. The first would be to treat the PFIC as a “qualified electing fund” (QEF). The QEF election lets the taxpayer distinguish between capital gain and ordinary income of the PFIC. However, Ritchie knows of only one Canadian mutual fund company that files the QEF. The second option is the mark-to-market election, in which all the year’s earnings are taxed as ordinary income at the highest marginal tax rate in the U.S. Ritchie’s advice to those in this situation is to avoid holding Canadian mutual funds/ETFs, find the Canadian mutual fund company that offers QEF statements, or own a portfolio of individual securities.

Estate Planning for Snowbirds

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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.

Americans in Canada Facing Obamacare Surtax

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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.