Cross-border estate planning 101 for cottagers

Cross-border estate planning comes with a unique set of challenges that can be tricky to navigate for cottagers. There are special considerations for Canadians with assets on both sides of the Canada-U.S. border, because each country has its own tax rules about trusts and estates that can sometimes conflict with one another.

Luckily, you don’t have to navigate these tax systems on your own. Having a solid cross-border estate plan in place—complete with legal and tax experts—is crucial.

“The tax systems in the US and Canada are very different as far as what happens after someone passes away,” says Andrew Nutbrown, an attorney at KJMLAW Partners in California who handles trust administration and estate planning for people with international properties.

“You really need to work with someone who’s knowledgeable and has an estate plan that deals with the U.S. assets properly,” Nutbrown says. “Otherwise, you’re going to miss huge benefits and pay a lot more tax.”

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What Canadian residents with property in the United States need to know

Canadian residents who own property in the U.S. are subject to American estate tax on the value of the property at death. However, there are all kinds of nuances when owning property in the U.S., such as whether the deceased individual or their spouse are U.S. or Canadian citizens. The same goes for their children or heirs.

American tax laws are complex, and they differ from Canada’s. Here’s a key difference to be aware of: “In Canada, when you pass away, all of your assets are deemed to be sold at fair market value. So you’re hit with capital gains when you die,” Nutbrown says. “In the U.S., they don’t have any taxation like that. But, what the government does is they get a tally of the value of all of your assets, and they impose a tax on it.”

That means Canadians who are not a citizen or a resident of the U.S. are taxed on almost the entirety of the estate. The Canada-U.S. Tax Treaty, which exists to help mitigate some of these challenges, dictates how Canadian citizens who hold property in the U.S. should be taxed. But this is complicated, too.

Currently, the U.S. estate tax exemption is $13.6 million per person, which is the amount you can gift or leave to your loved ones at your death without incurring a gift or estate tax liability. Marginal tax rates start at 18 per cent and can go as high as 40 per cent when U.S. assets exceed one million dollars. That means Canadian residents may be subject to taxes, if the value of the person’s worldwide estate at the time of death is above a certain threshold.

The treaty can help with that tax exposure though. Consider this scenario: a Canadian resident owns a U.S. home worth two million dollars. Nutbrown says they will be hit with around $640,000 in taxable estate. Taxed at around 40 per cent, that’s roughly $250,000 in estate tax payable.

“Absent the treaty, instead of having $250,000 in estate tax, it would probably be closer to $800,000 in taxes,” he says. “So, it makes a difference.”

Important deadlines for Canadian residents to know when filing U.S. estate tax returns

Another tip? Don’t miss the deadlines. If you own property in the U.S., make sure to file a estate tax return in the U.S. within nine months. “If they don’t file within nine months, they can apply for an extension up to 15 months,” Nutbrown says. “But missing those deadlines is big.”

It’s a lot to take into consideration, but proper estate planning is important, especially if you have property across borders. Nutbrown recommends finding a qualified cross-border expert to help with the intricacies. There are boutique law firms that focus solely on U.S.-Canada estate planning, and Canadian financial firms offer extensive guides online.

For example, the Society of Trust and Estate Practitioners Canada (STEP Canada), has experts. “That’s probably the easiest way to find someone that can deal with the cross-border issues,” Nutbrown says. “You’ll get an expert that’s a bit more specialized and will understand the dynamic between the Canadian and American system.”

However, if hiring one specialized lawyer isn’t an option, Nutbrown has a tip: “Get a U.S. estate plan for the American assets and a Canadian estate plan for the Canadian assets,” he says.

If this is your approach, it’s best to have them work together. “They have to talk to each other,” Nutbrown says. “Make sure they don’t revoke each other—I’ve seen that happen.”

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