STEP – The best-laid plans…

Check out this interesting article from STEP:

“As part of his campaign to ‘make America great again’, President Trump has made a number of bold proposals to restructure US taxes. One such proposal is the repeal of the US estate tax.

Existing regime


Currently, a US citizen or domiciliary will, on their demise, be subject to US estate tax at 40 per cent on the value of their worldwide assets, less liabilities, exceeding the lifetime exemption of USD5.49 million. For a married couple, the total lifetime exemption will be equal to USD10.98 million, and US estate tax is only payable on the value exceeding this limit. Under this regime, the heirs will inherit the assets at fair market value. The heirs may then sell the assets and will not be subject to capital gains tax (CGT) on the value when inherited. Therefore, there may be a tax-free transfer of assets from one generation to another, particularly for estates with a value lower than USD10.98 million for a married couple.

For non-US persons, US estate tax is applicable only on US situs assets. Under the general rule, there is only a credit of USD13,000 against the US estate tax payable. However, special provisions apply under the United States-Canada Income Tax Convention (the Treaty) to allow more relief to Canadian residents. Under the Treaty, Canadian residents may claim an exemption equal to a proration of the lifetime exemption above, based on the value of the US situs assets as a percentage of the total worldwide assets of the individual.



Under President Trump’s proposal, the US estate tax would be repealed. Instead, CGT could apply, with an exemption on the first USD10 million of assets. Further details related to this proposal are unknown at the time of writing.



Where an individual may be exposed to US estate tax, a typical planning strategy would involve using a trust or, in some cases, a corporation to own the assets. With the proposed repeal of the US estate tax, can we now abandon this planning approach?

The answer to this question is not as straightforward as one might think. We are still anxiously awaiting additional details about the proposal, and hasty decisions should not be made until the proposal becomes law. The US estate tax has previously been repealed, then subsequently reinstated. There is no guarantee that this will not happen again.

Therefore, each situation will need to be evaluated to determine the best planning under the circumstances. Short- and long-term horizons may warrant different approaches. Below are guidelines for consideration if and when the proposal becomes effective.

Use of a trust


A trust is a typical structure used to hold US situs assets for non-US persons. The decision to keep a trust structure will depend on whether or not it creates any adverse tax implications and the costs involved in maintaining the structure.

Generally, a trust will allow flow-through treatment, so it will likely be tax-neutral or beneficial, and not a disadvantage. However, the Canadian rules do not allow for tax deferral forever. There is a rule whereby all of the assets of a trust are deemed to be disposed of every 21 years (known as the 21-year deemed disposition rule). While the asset may be transferred from the trust to a Canadian-resident beneficiary on a rollover basis, the same may not apply for US tax purposes to property such as US real estate. This may result in having to recognise the gain on the assets prematurely. Therefore, careful consideration will be needed before new structures are established.

Use of a company


Another typical planning strategy is to hold US situs assets (such as US stocks) through a company (e.g. a Canadian holding company). In Canada, there is a refundable tax regime whereby investment income is taxed within a company at around 50 per cent, of which 30.7 per cent is refundable when the company pays a dividend to a shareholder. The shareholder then, in turn, pays tax on the dividend income from the company. This is Canada’s integration system. The overall tax payable, assuming that the shareholder is subject to tax at the top marginal rate, will be slightly higher when investment income is earned through a corporation rather than directly.

However, if the income is subject to US tax (e.g. a 15 per cent withholding tax on dividends), the overall tax cost is much higher; corporate ownership becomes disadvantageous. Therefore, these factors may need to be considered in determining whether or not the US stocks should continue to be held through the corporation.

Another factor that may affect the decision is where the source of funds is available. If the source of funds is within a corporation, that would be a reason to hold the assets through a corporation.

The repeal of the US estate tax will be welcome news for individuals who have been restricting their investments in US stocks for fear of exposure to estate tax. These are, indeed, interesting times, with significant changes to US taxes in the pipeline. A well-rounded advisor will need to be prepared to react.”