canada us cross border will planning august 2006 nadja ibrahim n.
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Canada-US Cross-Border Will Planning August 2006 Nadja Ibrahim. AGENDA. 1. U.S. Estate Tax Regime 2. Insurance 3. Will Planning: US citizen spouse US citizen decedent US beneficiary 4. Charitable Deduction Planning 5. Inheritance Trust Planning. US Estate Tax Regime.

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  • 1. U.S. Estate Tax Regime
  • 2. Insurance
  • 3. Will Planning:
      • US citizen spouse
      • US citizen decedent
      • US beneficiary

4. Charitable Deduction Planning

5. Inheritance Trust Planning

us estate tax regime
US Estate Tax Regime
  • U.S. citizens or residents (including dual citizens):
    • Taxed on FMV of worldwide estate at death
    • If assets < US$2 million  No U.S. estate tax
        • Unified credit available = $780,800
  • Non-resident aliens (“NRA”):
    • Taxed on FMV of U.S. situs property owned at death
    • If worldwide estate < US$2 million  No U.S. estate tax; otherwise,
      • If U.S. assets < US$60,000  no U.S. estate tax
      • May be increased under the Canada-U.S. Treaty
us estate tax regime1
US Estate Tax Regime
  • Enhanced Unified Credit / Exemption
    • Allows for a pro-rated amount of the unified credit available to a U.S. person, calculated as follows:
      • Unified Credit ($780,800) X US assets/worldwide assets
    • Unified credit is never less than $13,000 provided for under US domestic tax law
us estate tax regime2
Year (US$) Exemption (US$)

2002 $1 million

2003 $1 million

2004 $1.5 million

2005 $1.5 million

2006 $2 million

2007 $2 million

2008 $2 million

2009 $3.5 million

2010 N/A (repealed)

2011 & after $1 million

Unified Credit Highest

(US$) Estate Tax Rate

$345,800 50%

$345,800 49%

$555,800 48%

$555,800 47%

$780,800 46%

$780,800 45%

$780,800 45%

$1,455,800 45%

N/A 0%

$345,800 55%

US Estate Tax Regime

Insurance Common Mistake

  • Owning life insurance personally can have adverse US estate tax consequences.
  • “Incidents of ownership”, include the following:
    • right to change beneficiaries or their shares
    • right to surrender the policy for cash or to cancel it
    • right to borrow against the policy reserve
    • right to pledge the policy as collateral
    • right to assign the policy or cancel an assignment


  • Implications of having incidents of ownership:
    • US citizens are subject to US estate tax on the proceeds of life insurance which they own/have incidents of ownership, or if their estate is the beneficiary of the life insurance policy.
    • Value of insurance proceeds added to worldwide estate of Canadian which reduces tax credit allowed under Treaty
  • US person could create trust and contribute premiums to trust
    • Trust is owner of insurance policy
    • Family members are the beneficiaries
    • US person is not a trustee
    • Trust must be structured from both estate and gift tax perspective

US Citizen Spouse Will Planning

  • Mr. Brown - Canadian resident and citizen
      • Significant wealth, all assets left to Mrs. Brown on death
    • Mrs. Brown – Canadian resident and US citizen
    • On Mr. Brown’s death:
      • No US estate tax (unless significant US assets)
    • On Mrs. Brown’s death:
      • Will be subject to US estate tax on the value of her worldwide estate (including assets from Mr. Brown)
      • Current estate tax exemption is $2 million USD.
      • Watch insurance
us citizen spouse will planning
US Citizen SpouseWill Planning
  • Canadian spouse trust
      • Migration clause (possible move to US)
  • Structured to keep assets out of Mrs. Brown’s estate
      • No general power of appointment. Can’t appoint assets to
          • Herself
          • Her creditors
          • Her estate
          • Her estate’s creditors
  • Canadian spousal rollover applies
us citizen spouse will planning1
US Citizen SpouseWill Planning
  • Mrs. Brown – Trust terms:
    • Entitled to all income, including capital gains, to avoid adverse US throw-back rules
    • Discretionary capital entitlement
    • 5 and 5 power
      • Right to demand greater of $5,000 and 5% of trust capital once a year
    • Can be a trustee
      • Subject to an ascertainable standard restriction (health, support, maintenance and education).
      • Can’t participate in decisions to distribute to herself above the standard
us citizen decedent will planning
US Citizen DecedentWill Planning
  • Mr. Brown
    • Canadian resident, US citizen
    • Significant wealth
    • Assets pass to Mrs. Brown on his death
  • Mrs. Brown
    • Canadian resident, Canadian citizen
  • On death of Mr. Brown
    • No marital deduction for outright transfer to non-US citizen spouse (but marital credit under Treaty)
    • US estate tax liability on worldwide assets
    • May need to trigger Canadian tax to get FTC
us citizen decedent will planning1
US Citizen DecedentWill Planning


Mr. Brown’s Will:

  • Transfer to spouse/spouse trust
    • Qualifies for Canadian income tax rollover
    • Qualifies for marital credit – combined with unified credit shelters approx. $3.7 million USD from estate tax
  • Keep in mind amount of insurance owned by Mr. Brown – may increase estate value beyond $3.7 million USD.
  • If significant US assets ensure spousal trust created to avoid US estate tax exposure for surviving spouse on the US assets
us citizen decedent will planning2
US Citizen DecedentWill Planning

SOLUTION 2 – For Estates over $3.7 million USD

  • Qualified Domestic Trust (QDOT) for US purposes
      • Eligible for the marital deduction
      • Estate tax deferred until death of Mrs. Brown
  • Terms of QDOT:
    • Spouse entitled to all income
    • No one other than spouse can take capital during lifetime of spouse
    • At least one trustee must be a US citizen
    • If assets >$US 2 million
        • Provide security (bond or letter of credit) OR
        • US financial institution must be a trustee
  • Evaluate benefits of deferral
    • assess whether Canadian tax liability sufficient to offset US estate tax

US BeneficiaryWill Planning

  • Create special trust for US beneficiary to ensure assets do not form part of beneficiary’s estate for US estate tax purposes.
  • US beneficiaries are taxed on distributions from a Canadian trust. The US calculation is complicated and often involves an interest component – pay income/gains from trust annually.
  • US beneficiary needs to file Form 3520 if he/she receives any distribution from the Canadian trust. Form 3520 needs to be filed even if the distribution is non-taxable.
  • Penalty for failure to file Form 3520 is 35% of the value of the distribution received by the beneficiary.

US BeneficiaryWill Planning

  • US anti-deferral rules:
  • Rules may apply when a Trust or Estate owns shares in a Canadian company and there is a US beneficiary – usually applies if Canadian investment holding company involved.
  • Rules require the beneficiary to include his/her share of the company’s income on the beneficiary’s US income tax return, regardless of whether an amount is actually received.
  • Income is taxed to the beneficiary at regular tax rates.
  • Evaluate whether US beneficiary’s entitlement may be satisfied with assets other than company shares.

Charitable Deduction Planning

  • Planning is available for a Canadian resident who wishes to make a charitable bequest and owns US property (say, US securities), which will be subject to US estate tax on death
  • US provides deduction for donation of US property to US domestic charity
  • Canada-US Treaty provides for charitable deduction for bequests to Canadian registered charity
  • If Canadian property is donated the deduction is prorated.
  • If US property donated there is a dollar for dollar deduction
  • Particularly attractive given new legislation which eliminates Canadian capital gains on donation of securities to charity.

Charitable Deduction Planning


  • Canadian resident taxpayer died in 2006 (never a U.S. citizen)
  • No spouse
  • Total worldwide assets = US$3,500,000
  • Includes U.S. securities = US$400,000
  • Charitable bequest in will = US$100,000
  • Taxpayer provides in will that bequests to charity should be satisfied with US securities.
  • Charitable deduction planning will eliminate or reduce US estate tax payable.

Inheritance Trust PlanningClient Scenario

  • Sally – Canadian resident, US citizen
  • Sally’s mother – US resident and US citizen
  • Mother is quite elderly and Sally expects to inherit significant wealth from mother’s estate.
  • Client’s Question: How should I receive the inheritance?

Inheritance Trust PlanningStructure


- Sally

Sally’s mother (US)

(only contributor)



  • Sally and U.S. resident
  • Sally’s mother establishes US domestic trust under will for benefit of Sally:
    • Beneficiary’s interest is discretionary
    • Beneficiary given limited power of appointment
    • Trust assets invested

Inheritance Trust PlanningIncome Tax Opportunity

  • Reduced income tax rates on investment income
    • 15% on qualified dividend income
    • 15% rate on long-term capital gains
    • State tax
  • Limits US estate tax exposure for US citizen beneficiary
    • subject to Generation Skipping Tax Limit in the US
  • Canadian non resident trusts rules do not apply
  • 21 year rule does not apply

RRSPs and US Estate Tax

  • US assets held in RRSP are subject to US estate tax
  • Elimination of foreign content rule in RRSPs may see increase in US estate tax exposure
  • Canada allows a foreign tax credit for US estate tax paid against Canadian taxes arising on US property on death due to the Treaty
  • CRA has indicated that Treaty relief does not apply to RRSPs.
  • Can apply to Competent Authority if the result is double tax – should be allowed since IRS has allowed such a credit.
  • Problem likely to be resolved as a result of current Treaty negotiations.