You may need cross-border estate planning if you:
- Own a Canadian company with a U.S. subsidiary or that earns a significant amount of income in the U.S.
- Want to retire in the U.S. or spend a significant amount of time in the U.S. in retirement
- Are a Canadian working in the U.S. who wants to return to Canada after retirement, or have worked in the U.S. in the past and have a pension plan in the U.S.
- Are a U.S. citizen living in Canada
U.S. Pension Plans
If you’ve worked in the U.S. in the past and invested in a U.S. pension, and you’re now living in Canada, you may want to move your pension to Canada to manage your investments in one country or perhaps to take advantage of favourable exchange rates. U.S. company pension plans may be heavily invested in the employer company and other U.S. entities for which you might lack investment information in Canada.
The IRS requires tax to be withheld from any U.S. pension plan distribution at 15 per cent or 30 per cent. A U.S. Individual Retirement Account (IRA) may also withhold a 10 per cent penalty for an early withdrawal.
You can transfer IRA or 401K company pension plans into your RRSP by a direct rollover in Canada without Canadian tax, similar to the way you may transfer your Canadian employer’s pension into your RRSP. Our accountant experienced with cross-border tax can assist with plans to use the withholding tax for foreign tax credit in Canada.
U.S. Estate Tax
U.S. estate tax is different from Canada’s taxes on death. In Canada, you’re deemed to have disposed of everything at death, unless the property transfers directly to a spouse. The deemed disposition is a tax on capital gains, as if you sold it all when you died.
The U.S. estate tax is a tax on your net worth. The IRS calculates tax based on the net worth or fair value of your assets and investments, in excess of an exemption amount.
U.S. estate tax will apply to a Canadian’s U.S. assets, such as shares in U.S. entities and U.S. real estate. The U.S. estate tax also applies to the worldwide estate of a U.S. citizen residing in Canada, just as U.S. income tax applies to the worldwide income of a U.S. citizen residing in Canada (see U.S. Personal Returns). There is some good news: as of 2018 the estate tax exemption was increased to $11 million U.S. per person. The exemption amount is indexed annually and is proposed to remain for 10 years.
A U.S. citizen may claim the entire exemption and, in certain circumstances, exemption for assets transferred to a spouse. A U.S. alien (non-citizen) Canadian resident is entitled to a pro rata share of the exemption based on the proportion of U.S. assets to worldwide assets. An estate is required to file a U.S. estate tax return to prove eligibility for the exemption, and often also to allow title to transfer in the U.S., even if no tax is due.
If you or your parents were born in the U.S., it’s important to determine whether you have U.S. citizenship. Talk to your advisor to ensure your estate is planned for and protected.