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Michigan has a good many Canadian citizens who are legal residents, but have not obtained U.S. citizenship.
In case of a married couple, one or both spouses may be Canadian citizens.
Dual nationality couples, where one spouse is a Canadian citizen residing in the U.S., raise special estate
planning challenges.
WHO IS SUBJECT TO U.S. ESTATE TAX?
A Canadian citizen domiciled in the U.S. is subject to U.S. estate tax at death on their world wide property. Is
every Canadian citizen residing in the U.S. subject to this tax? Theoretically the estate tax test is different from
the income tax test. Before income tax as well as immigration purposes, "residence" is important. For
purposes of our brief examination we will assume that the Canadian citizen is subject to U.S. tax with
"domicile" in the U.S. as provided by the IRS regulations.
If the Canadian citizens spouse has substantial assets will there be a U.S. estate tax?
NORMAL RULE. If the Canadian spouse is the decedent, leaving a U.S. citizen survivor, the regular U.S.
estate rules will apply, with a life time credit and unlimited marital deduction probably eliminating any tax
problem.
What if the decedent is the U.S. citizen leaving a surviving Canadian citizen spouse? The normal rule in the
case of a surviving non-citizen spouse is that there is no marital deduction unless the property of which a
marital deduction is sought is left in a "qualified domestic trust" (Q-DOT), under IRS section 2056(A).
Generally a Q-DOT trust requires a U.S. bank as a trustee , to make sure that any trust distributions are
subject to estate tax as if they were part of the decedent’s taxable estate.
Does this mean that a Q-DOT is necessary whenever there is Canadian surviving spouse?
THE U.S. CANADA TAX PROTOCOL
Enter the complex special rules that apply when the laws of either Canada or the U.S. are imposed on
property of a resident or citizen of either country. The Protocol came into force on November 9, 1995 and will
apply to deaths after that time.
While there are numerous fact situations, in this instance we are dealing with an estate plan for a married
couple of which one spouse is a Canadian citizen and the other is a U.S. citizen, but both reside in the U.S.
In this case a Q-DOT trust may not be necessary depending on the values involved. The Protocol grants a
special marital credit (not a marital deduction) that may obviate the need for a Q-DOT, in the case of a
surviving Canadian citizen spouse.
SITUS QUESTIONS
Different considerations will apply depending on the "situs" of property such as real estate securities and
bank accounts. The Protocol establishes special rules for determining "situs" as it effects the tax rules of
each country. These rules would come into play if the surviving Canadian spouse decides to move back to
Canada. What U.S. estate tax would still apply?
Situs also will effect the Canadian income tax impact on Canadian property. Canada has no estate tax, but
levies a "deemed sale" income tax on property at death. This generally won’t apply to U.S. situs property but
may or may not be imposed on Canadian situs property depending on circumstances.
Tax credits may be allowed back and forth between the Canadian income tax and U.S. estate tax. Needless to
say fact circumstances have infinite variations, and the more complex the estates involving the real estate
securities bank accounts, and business properties, the more intricate the web becomes.
CANADIAN CITIZENS WHO ARE NOT RESIDENTS
What happens in the case of a Canadian citizen who spends part of his time in the U.S. and part of the time in
Canada or elsewhere? Here again the income tax test may be different from the estate tax test. Moreover, it
may be difficult to ascertain from all the facts and circumstances whether a Canadian citizen will be
considered to be "domiciled" in the U.S., even though he or she may own property here. In these cases a
"either-or" plan probably needs to be put in place.
THE BOTTOM LINE
The bottom line of this discussion is that special consideration needs to be given to estate planning for
couples with a non citizen spouse. The U.S. Canada tax Protocol offers some relief, but won’t solve the
problem in all instances, particularly where larger estates are involved.
If you have clients, where one or both spouses is a Canadian citizen, it is definitely worthwhile to consult
expert advice in devising the appropriate estate plan. We look forward to being of assistance and would look
forward to your referral.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| April 2001 ESTATE TAX MAZE - CANADIAN CITIZENS by James R. Modrall III, J.D., C.P.A. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |