Investors owning significant U.S. property need to be aware of changes coming to U.S. Estate Taxes (and you thought keeping up with the Canadian tax code was headache enough). With the tax cuts enacted by the Bush administration scheduled to expire at the end of 2010, estate taxes in the U.S. are expected to revert to higher rates that applied in 2001 and a lower estate tax exemption of $1 million. Unfortunately, these changes will impact Canadian citizens living in Canada and owning U.S. assets such as a vacation property, condominiums, securities trading in U.S. exchanges etc.
The US Estate Tax that Canadians might face is based on two factors: (1) The total value of their U.S. located property and (2) The proportion of their U.S. assets compared to their worldwide assets. Let’s take a concrete example. Canadian citizen and resident Peter owned $250,000 worth of US securities and his total estate is valued at $1,500,000. With Peter’s U.S. located property valued at $250,000, his estate will face a tax of $70,800 before exemptions in 2011. Since, 1/6th of Peter’s worldwide assets are located in the U.S., Peter will receive a prorated credit of $57,633 and a net U.S. Estate Tax of $13,166. As you can see in this example, even modest estates might be on hook to pay U.S. Estate taxes.
PS: In my previous post on U.S. Estate Taxes, I incorrectly mentioned that the then exemption of $2 million applied to U.S. property held by Canadians. As pointed out here, the exemption for Canadians will also depend on what proportion of their worldwide assets are located in the U.S.