CANADIAN DEATH/ ESTATE TAX – Many people wrongfully assume that there is no estate tax in Canada. They simply are not aware of the “deemed disposition tax” in Canada that occurs at death. Similar to the deemed disposition tax when you exit Canada, this tax applies when you die. This means on your final Canadian tax return you must report the full value of your RRSPs, the capital gains in investment real estate, stocks or bonds plus any other income realized in the year of death. Needless to say, with Canadian income tax rates reaching 45 – 50%, this can be a significant tax burden. In addition to the federal tax burden, the provinces get their share of the proceeds plus a variety of additional probate fees that they levy individually.
US DEATH/ ESTATE TAX – For anyone moving to the US, the myriad of taxes that occur at death needs to be considered. There could be estate tax, income tax, state inheritance tax, gift tax and generation skipping transfer taxes. The amount of estate tax is based on your total net worth (including life insurance proceeds) and can be as high as 48%! This is in addition to professional fees, court costs and probate fees that could consume another 5% of the value of your estate. RRSP’s are particularly troublesome because they could be triple taxed: First, the deemed disposition taxes at death in Canada; Second, any US federal and state income taxes due on the income accrued in the RRSP must be paid and Third, the RRSPs are included in the estate and may be subject to US estate tax as well. Fortunately, the Canada/US Tax Treaty does allow some foreign tax credits (or at least a deduction) in some circumstances to offset the double taxation. In addition, recent changes in the US estate laws will make estates greater than the “estate exemption” (U$5.45M in 2016 per person) subject to US taxes unless the requisite planning is done. However, to take maximum advantage of this U$5.45M exemption, a proper US estate plan is required.
With no, or improper planning, the estate tax can be punishing as illustrated with the examples below:
|Gross Estate||Settlement Costs||Shrinkage|
|Alwin C. Ernst, CPA||$12,642,431||$7,124,112||56%|
The settlement costs include the estate taxes, court fees, legal and accounting fees, probate fees, etc. that go into settling these estates after death. Your first line of defense in taking control of your financial affairs no matter what happens to you (death or incapacity) and reducing the settlement costs is a full “trust-centered” estate plan.
DEATH OF NON-CITIZENS – In the US, non-citizens are not given the same estate planning benefits as US citizens. For example, US citizens can receive all of the spouse’s assets at the first death. However, non-citizens are not given the same “unlimited marital deduction” because the US government fears the non-citizen could flee the country with the assets without paying any taxes owing. As a result, tax is typically due at the first death. To avoid taxation at the first death, Qualified Domestic Trust (QDOT) provisions in your will or living trust may be needed.