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APPENDIX B

Date: September 8, 1994
Bulletin # 4825

To: All Representatives
Re: Tax News

1. Estate Taxes

Formerly, the U.S. levied estate taxes where the deceased held property located in the U.S. Citizens of the United States were granted an exemption of $600,000 US before estate taxes would apply but non-residents were only granted an exemption of $60,000 US. For Canadians holding property in the U.S., the estate taxes combined with Canadian taxes on deemed disposition of capital property at death were often onerous - in some cases up to 90% of the value of the U.S. property. The problem was the result of the fact that Revenue Canada would not allow a tax credit on the final return of the deceased in respect of U.S. estate taxes that were paid.

A new agreement has been signed (but not yet ratified) that will change the rules effective January 1, 1995. Under the agreement, non-residents will also qualify for the $600,000 US exemption before estate taxes would be levied. The way the rules work is that the $600,000 exemption is pro-rated as a percentage of worldwide wealth at the time of death. To illustrate, suppose at death the client's estate had a total value of $600,000 and the entire estate was located in the U.S. In this case the full exemption would be available and estate taxes would not apply. If, however, the client's total estate were worth $1.2 million US and $600,000 were located in the U.S., pro-ration of the exemption would be 50% and only $300,000 would be available. This means that $300,000 of the U.S. assets would be subject to estate tax, the amount of which would be in excess of $50,000 US.

Even if a client is subject to U.S. estate tax given the rules outlined above, there are relieving provisions provided in the agreement. First, property left at death to a surviving spouse is not subject to estate tax. At the death of the second spouse, he/she qualified for a double exemption. Second, if worldwide assets of the deceased do not exceed $1.2 million US, capital assets other than real estate (e.g. stocks, bonds, mutual funds) will not be subject to estate tax. Third, Revenue Canada has now agreed that where a Canadian resident has been subjected to U.S. estate tax, Canada will allow a claim of a foreign tax credit but only to the extent of Canadian taxes which resulted from the deemed disposition at death of property located in the U.S. To illustrate, suppose the client dies and after claiming whatever exemption is available under the pro-ration formula, is subject to $50,000 US estate tax. Canadian tax of $40,000 is triggered on the deemed disposition of U.S. property. A foreign tax credit of $40,000 would be allowed on the final return of the deceased since the estate tax exceeded the amount of Canadian tax liability. For the most part in this example, the double taxation problem has been eliminated.

Finally, the opportunity. The agreement, when ratified, will be retroactive to November 10, 1988. Any Canadian resident who died after November 9, 1988 and was subject to U.S. estate tax is eligible to have the amount of the tax paid refunded to his/her estate. To qualify for a refund, the estate must file a request no later than one year after the agreement comes into effect (as noted - January 1, 1995). If you have a client(s) who are eligible for a refund because a family member died after November 9, 1988 and was subject to estate tax, you can show your credibility as a financial planner by advising them of the refund opportunity.


The purpose of this bulletin is to inform you of current developments, not to provide legal advice. Clients should consult their professional advisors for advice based on their specific circumstances.


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