contributed by Nathan Gehring
One of the concerns many individuals considering a move to the United States have is the US estate taxation system. With an estate tax rate of 40% on wealth, many wealthy potential immigrants have significant concerns over how this tax will take a bite out of their wealth passing to heirs.
But recently, while preparing analysis on this issue for a client, I was reminded that estate taxes are not only an American issue. Yes, the US estate tax gets lots of media attention and can be extremely high for certain individuals. However, the Canadian equivalent to estate tax (although it is not named so) could be viewed as potentially even more harmful than the US estate tax system.
Big Numbers versus Big Population
The reality is the US estate tax, as currently implemented, impacts an incredibly small percentage of US taxpayers. With a lifetime exclusion amount of $5,340,000 per individual not subject to estate taxation (double that for couples with portability rules), most people simply don’t have to worry about US estate taxes currently. For those individuals or families with estates in excess of exclusion amounts, significant taxation is a major concern and planning for this tax can be critical. Without proper planning, giant swaths of wealth can be inadvertently lost to estate taxes.
The estate tax-equivalent in Canada works very differently and leaves virtually the entire population of Canadian citizens subject to it. At death in Canada, most of an individual’s assets (principal residence excluded) are deemed disposed — basically, they are deemed to have been sold and any tax consequences of a sale become payable. Assets with embedded capital gain have tax due on them. Tax-deferred vehicles (such as RRSPs) are treated as if distributed and taxed as ordinary income. And there is no exclusion amount as in the US to this deemed disposition tax. Pretty much every Canadian citizen with assets has the potential for a tax bill to come due at his or her death. Whether it’s called an estate tax or not is irrelevant.
For those impacted by estate taxes on the US side, good planning can go a long way to reducing or even eliminating the potential for estate taxes even for very wealthy individuals. Estate planning is a common practice in the United States and many techniques can be employed to allow individuals to continue to pursue their goals while also looking to be tax efficient. In a cross-border context, we have some additional tools to help our clients.
But in Canada, it seems this planning is often ignored or simply not believed to be a significant concern. Yet, the reality is that a far larger percentage of the population in Canada has a potential estate tax bill to be concerned with than the US population.
When considering a cross-border move, you certainly want to be aware of the potential for estate tax in the United States. Just remember, you should be aware of and planning for “estate tax” in Canada, as well.