The U.S. Vacation Home & U.S. Offshore Voluntary …...2012/05/03 · & U.S. Offshore Voluntary...
Transcript of The U.S. Vacation Home & U.S. Offshore Voluntary …...2012/05/03 · & U.S. Offshore Voluntary...
The U.S. Vacation Home
& U.S. Offshore
Voluntary Disclosure
Cheyenne J.H. Reese, LLM
Legacy Tax and Trust Lawyers
May 24th, 2012
U.S. Estate Tax
Imposed on transfers of property on death
Rate of tax above $500,000 is 35%
For U.S. citizens and residents, imposed on worldwide taxable estate
For non-citizen non-residents, imposed on “U.S. taxable estate”
5/28/2012 2
U.S. Estate Tax (cont’d)
Residency based on “domicile”
Physical presence with intention to remain permanently or no current intention to leave
Assume for purposes of our discussion that we have a Canadian domiciliary who is not a U.S. citizen (an “NRA”) purchasing a vacation home located in the U.S.
For U.S. citizens and residents exemption now at $5,120,000 (adjusted for inflation)
For NRA, $60,000 is exempt
2013?
5/28/2012 3
Deductions Against Estate Tax
Unlimited Marital Deduction
Applies to outright transfers to a U.S. citizen (“legally married”) spouse and certain qualifying transfers in trust for a U.S. spouse
Charitable Deduction
Funeral and other Testamentary Expenses
Outstanding Debts and Liabilities
NRA will only get portion of deductions equal to U.S. Assets
Worldwide Assets
Full disclosure of Worldwide Assets required
5/28/2012 4
Estate Taxation of
Non-Resident Aliens
Applies to U.S. situs property, which includes:
Real property located in the United States;
Shares in a U.S. corporation; and
Tangible personal property located in the United States
5/28/2012 5
Estate Taxation of
Non-Resident Aliens (cont’d)
Marital Deduction Property passing to a U.S. citizen spouse Applies to transfers to a non-U.S. citizen spouse
through a “qualified domestic trust” (QDOT) • Trust must satisfy terminable interest rule, • Have at least 1 U.S. trustee, • U.S. trustee must have right to withhold estate tax on
distributions of corpus, and • Security requirements must be satisfied
Only defers the tax Tax is applied on the appreciated value at the
surviving spouse’s death
5/28/2012 6
NRA’s Treaty Credit
$13,000 credit, shelters $60,000
Article XXIX B alternative credit
Available to every Canadian resident (other than a U.S. citizen)
Entitled to a proportionate unified credit equal to:
U.S. Assets x $1,772,800 (2012)
Worldwide Assets
5/28/2012 7
NRA’s Treaty Credit
Example. Deceased Canadian citizen and resident owned the following assets: U.S. $
Insurance Proceeds 1,000,000
RRSP 1,000,000
House 1,000,000
Canadian Investments 1,500,000
U.S. Condominium 2,000,000
Total 6,500,000
Estate would be entitled to an Applicable Credit of $545,477, as follows:
$2,000,000 x $1,772,800 = $545,477
$6,500,000
5/28/2012 8
Calculation of NRA’s Estate Tax
Same graduated tax rates as for U.S. citizen
Example (cont’d)
U.S. Taxable Estate $2,000,000
Tentative U.S. Estate Tax $680,800
Less: Applicable Credit ($545,477)
Equals: Net Tax $135,323
5/28/2012 9
Calculation of NRA’s Estate Tax
Extra Marital Credit
• Calculated same as Treaty Credit
• Outright to Canadian Spouse or in qualifying trust for Canadian Spouse
• Better than QDOT because savings (up to $1,772,800) vs deferral
5/28/2012 10
Calculation of NRA’s Estate Tax
With extra credit
Example (cont’d)
U.S. Taxable Estate $2,000,000
Tentative U.S. Estate Tax $680,800
Less: Applicable Credit ($545,477) Less: Treaty Credit ($545,477)
Equals: Net Tax nil
5/28/2012 11
Treaty Credit
Canadian credit for U.S. estate tax paid at death
Applied against any income, profits or gains from any U.S. situs property
5/28/2012 12
U.S. Gift Tax for U.S. Citizens
Imposed on transfers of property during lifetime
Imposed at the same graduated rates as the estate tax
Imposed on transfers on a cumulative basis
For U.S. citizens and residents, Applicable Credit (maximum $5,120,000) applies to gift tax and reduces exemption at death
5/28/2012 13
U.S. Gift Tax for U.S. Citizens (cont’d)
Annual Exclusion – each year an individual is entitled to gift up to $13,000 to each of any number of donees
Increased to $139,000 for gifts to non-citizen spouse Direct payments of medical and tuition expenses are
generally excluded from taxable gifts, regardless of amount
Marital Exclusion – unlimited deduction for gifts to a U.S. citizen spouse only
5/28/2012 14
U.S. Gift Taxation of NRAs
U.S. Gift Tax Liability for NRA
Gifts of U.S. real estate or tangible personal property located in U.S.
• Gift of vacation property itself; or
• Gift of cash to buy vacation property
35% top gift tax rate
Treaty credit is not available to offset tax on gifts by an NRA
No foreign tax credit for Canadian capital gains tax and vice versa
• Canada treats gifts as disposition at fair market value
5/28/2012 15
U.S. Gift Taxation of NRAs
Treaty credit is not available to offset tax on gifts by an NRA
No foreign tax credit for Canadian capital gains tax and vice versa
• Canada treats gifts as disposition at fair market value
$13,000 annual exclusion is available
Deduction for gift to NRA spouse is limited to $139,000 (2012) per year
Gifts to U.S. citizen spouse qualify
5/28/2012 16
Planning for Canadian NRA Owning U.S.
Situs Property Generally
The Tools
Treaty Credit
Treaty Marital Credit
Lifetime Annual Exclusions ($13,000 and $139,000)
Unlimited Marital Deduction to U.S. citizen spouses
No gift or estate tax on certain intangibles
QDOT
Charitable exemption
5/28/2012 17
Possible Solutions
Canadian Corporation
Cannot use a Canadian corporation for vacation home because of “shareholder benefit” problem for Canadian income tax purposes
Higher corporate U.S. tax on sale
5/28/2012 18
Possible Solutions (cont’d)
Canadian Trust
Properly drafted trust holds U.S. Vacation property (to avoid estate tax)
Settlor cannot retain any interest
Typical Canadian family trust will not work (U.S. income tax and estate tax issues)
Trust to be funded prior to locating property (to avoid gift tax)
Watch out for mismatch of foreign tax credits on rental income and sale
Watch out for 21 year deemed disposition
5/28/2012 19
Possible Solutions (cont’d)
Non-Recourse Debt
Recourse only against Real Property
Netted against value of Real Property
Must be bona fide
Difficult to procure for NRA
Not often seen in practice
Asset Allocation and Wills
One spouse holds U.S. assets and other spouse holds balance
Testamentary Trusts with independent Trustee or Ascertainable Standard for distributions
Consider Gift Tax and Canadian Attribution Issues
5/28/2012 20
Possible Solutions (cont’d)
Life Insurance
Consider ownership of policy
Best used in tandem with Asset Allocation and Wills
Insurance Trust may be appropriate
QDOT with Charitable Gift
U.S. Vacation Property is held in QDOT for survivor
• Deferral of U.S. Estate Tax
Charitable Deduction for U.S. real property gifted to U.S. or Canadian charity
If no QDOT, no Charitable Deduction for gift to Canadian charity but available if to U.S. charity
5/28/2012 21
Possible Solutions (cont’d)
Hybrid Entity
Limited Partnership in Canada
Check the Box; treat as Corporation for U.S. purposes
Corporate Tax vs. Personal Tax
Complex Tax Reporting
Can be used for all U.S. assets
Law not 100% clear on situs
Do Nothing
Powers of Attorney to Facilitate Sale
Play the odds (e.g. plan to sell before death)
In many cases exposure is small; do the math first
5/28/2012 22
OVDI
2009 and 2011 Programs closed
January 2012 new Program opened
Fixed penalty structure (27.5% / 5%)
8 years of returns (tax and informational)
Guidance not issued
Canadian-specific issues (including RRSP, RESP, TFSA)
5/28/2012 23
Conclusion
Careful Estate Planning creates significant U.S. tax savings.
Thank You.
Cheyenne J.H. Reese Legacy Tax + Trust Lawyers
604.631.1251 [email protected]