Why cross-border issues are a growing part of estate planning

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Wealth transfers are often not just a matter of passing generations, but of borders. Many Canadians have built businesses in other countries, have vacation homes abroad or, if they immigrated here, own assets or property in their home country.

This challenges advisors and estate planners to help clients navigate tax and asset disposition implications that may span a wide range of jurisdictions.

“I would be hard-pressed to think of a client situation where there isn’t a related issue, whether it’s residency, citizenship, beneficiaries or assets. It’s just a fundamental part of every conversation we seem to have now,” says Nicole Ewing, director of tax and estate planning at TD Wealth in Ottawa.

Tax laws can be complicated, even more so when it involves the cross-border holding of financial securities and shares, commercial and corporate assets or property.

Real estate is probably the largest foreign-owned asset class held by individual Canadians, with the majority of such property in the US. This is becoming more and more common. Since 2010, Canadians have bought just under 450,000 U.S. residential properties, according to Statista.

“More baby boomers now have property outside of Canada that will either be passed on to their children or sold. That next generation is also looking to diversify their assets and not hold them all in Canada,” says Julie Shipley-Strickland, Senior Wealth Advisor at Wellington-Altus Private Wealth Inc. from Calgary.

Canada and the US have a tax treaty covering citizens of both countries that stipulates the treatment of asset sales, income taxation and other considerations. Most tax treaties provide for foreign tax credits that can be applied to offset applicable Canadian taxes and other exemptions.

In the US, there are no annual tax implications for a Canadian who owns US real estate, including a vacation home, as long as it is only for personal use and not rented out. But Canadians who die owning property in the US are subject to taxes.

For non-US persons, an estate tax is levied on US assets in excess of $60,000, including real estate. However, one of the advantages of the Canada-US tax treaty is that it provides Canadian residents with potential tax credits that can reduce their US property tax liability.

A Canadian who sells or gives away US real estate may be required to withhold and remit a percentage of the sale price (usually 15%). But that tax can also be reduced through tax planning strategies, Ms. Ewing says.

“To the extent that you pay taxes, the goal is to get credit for paying those taxes when it comes to making returns to Canada.”

Should Canadians leave assets abroad?

Canadians who own more than $60,000 in assets are required to file an estate tax return in the US, even if they owe no tax on it. So Canadian executors and beneficiaries need to be aware of possible delays in repatriating those assets.

“This can slow down your entire estate being processed if your executor has to wait [U.S. Internal Revenue Service] to issue a certificate of authorisation, which can take years,” says Ms Ewing. “It says six to nine months on their website, but in our experience, it’s often that.”

For many clients, it makes sense to leave those assets where they are, Ms. Shipley-Strickland says.

“Some people plan to travel and/or live a good part of their time abroad or in the US or Mexico,” she says. “Do they really want to bring assets back when they could be living in that country in retirement for three, four, five months a year? This is a very individualized response.”

If the assets are sold and taxes paid in their home jurisdictions, the various tax treaties Canada has with associated countries likely mean there is no double taxation. However, beneficiaries need to be careful for other reasons, says Ms Shipley-Strickland.

For example, a client receiving Old Age Security benefits could see them back to zero if their income skyrockets because they repatriated a large amount of income from assets. “There has to be some planning about when and how it’s done.”

Gifts from a foreign estate could limit taxes

While gifts from a foreign estate can minimize taxation, Ms Shipley-Strickland notes that current guidelines place barriers on how much can be moved before the tax authorities scrutinize the transfer.

The general anti-avoidance rule allows the Canada Revenue Agency to assess taxes where a taxpayer complies with the letter of the law but not the “object, spirit and purpose thereof which causes a misuse or abuse of the Income Tax Act.”

“Talking to different cross-border professionals and seeing what I’ve seen, a lot of people are leaning towards around $100,000 as the maximum. But it’s not black and white. And as a general rule, you can’t give away properties,” she says.

Ms. Shipley-Strickland adds that clients should consult with a tax professional who handles these businesses to better understand what would be acceptable.

“The mechanism behind it depends on the country we’re dealing with, the type of asset and the situation of that person.”

The Society of Trust and Estate Practitioners is a resource for any client navigating cross-border asset issues. This global professional body comprises lawyers, accountants, administrators and other practitioners specializing in estate and succession planning.

“No one should have to do this alone, to the extent that they have financial advisers, accountants, lawyers in this country and the other,” says Ms Ewing. “They should all be connected and coordinated with each other, especially with the beneficiaries.”

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