1.07 U.S. Vs Canadian Estate Taxation
The U.S. and Canada have considerably different systems of taxation related to the estates of deceased persons.
(a) Estates in Canada
For Canadian purposes, a Canadian resident, is deemed to have disposed of all property owned at the date of death at fair market value, thus triggering
capital gains tax on any unrealized capital gains, with the tax payable by the estate. Tax deferred items, such as RRSP's are deemed to be disposed of at the same time, giving rise to regular income for the
estate in the year of death, subject to certain rollovers available to the spouse of the deceased. In order to alleviate some of the tax burden resulting from these dispositions, the estate is permitted to file
up to four separate income tax returns for the same decedent for the year of death for four separate classifications of income. A personal exemption may be claimed on each of the returns, and income tax is
calculated on each return at graduated rates, starting from zero. The beneficiaries of the estate receive the property with a tax value equal to the fair market value used by the estate on the deemed
disposition, and there is no system of estate taxation.
  
(b) U.S. Estate Taxation of Residents and Citizens
The Economic Growth and Tax Relief Reconciliation Act of 2002 has effectively repealed the estate tax.
In the U.S., although estate tax is based on the value of the estate at the date of death (or the alternative valuation date which can be up to 6 months after the date of death), the estate tax in the
period before elimination of the tax is subject to tax at rates ranging from 18 to 50%, but the tax rates in the phase out period will be reduced by the following percentage points in the years specified.
Calendar Year Percentage of
Tax Reduction
2004 1.0
2005 2.0
2006 3.0
2007 5.0
2008 7.0
2009 9.0
2010 11.
Each U.S. citizen or resident taxpayer is allowed an exemption against the gift and estate tax. The exemption amount shields a total transfer of $675,000 from tax in 2000. This exemption amount
will gradually increase to permit $1 million to pass free of estate tax in 2006. The exemption amount will increase as it is phased in according to the following schedule:
· $675,000 in 2000 & 2002
· $700,000 in 2002 & 2003
· $850,000 in 2004
· $950,000 in 2005
· $1 Million in 2006
The estate tax system is designed to defer the major tax cost until the second of a married couple die, since transfers to a U.S. spouse are exempt from estate taxation (by the application of the
marital credit). Qualified trusts are also used to plan an orderly taxation of estates. Severe complications may result in cases where a U.S. citizen is married to a non resident alien, since the U
.S. citizen's estate may be increased by a bequest from a non resident alien spouse. Specialized planning including the use of trusts is recommended in such cases.
The exemption against estate tax is reduced by taxable lifetime gifts exceeding the annual gift limit, thus reducing the opportunity for distributing an estate during the lifetime of the decedent.
The beneficiary of an estate receives property at the fair market value used in the estate valuation, notwithstanding that no capital gains tax was paid by the estate on the value of the assets.
(c) U.S. Estate Taxation of Nonresident Aliens
Prior to 1988 non-resident aliens of the U.S. were subject to estate taxation only on U.S. situs assets subject to a reduction of $60,000, but at tax rates that ranged from 6% to 18%, thus
resulting in a tax rate more favorable than for U.S. citizens and residents.
The revised Protocol signed on March 17, 1995 attempts to harmonize the two tax systems, since it taxes only U.S. situs assets, and permits the full reduction, pro rated on the basis of U.S. situs
assets to worldwide assets. In international estates, the marital credit is calculated as the lower of the unified credit or the amount of U.S. estate tax which would otherwise be payable on the transfer
of the property to the spouse.
(d) Foreign Tax Credits for Estates
Since the basis of taxation of estates is different in Canada and the United States, no foreign tax
credit is permitted. However, Canadian capital gains taxes resulting from deemed dispositions on death are deductible from the gross estate for U.S. purposes.
Small estates of nonresident aliens (currently not in excess of 1.2 million dollars in worldwide assets
) are exempt from estate taxation in the U.S.
|
