Part 2 of yesterday’s STEP article:
The probate application process varies greatly among Canadian jurisdictions, and the requirements are generally strict. Further, a foreign (including an extra-provincial) grant is not usually effective when dealing with property in a Canadian province or territory. The foreign grant may be validated by the appropriate Canadian court through the process of ‘resealing’ the grant or obtaining an ancillary grant in the relevant Canadian jurisdiction. Note that if the estate representative does not live in the jurisdiction where the grant is applied for, a surety bond or other security may be required, adding costs and delays to the estate administration.
Significant tax consequences may be triggered upon the distribution of Canadian assets from an estate to foreign beneficiaries. Payments of income from Canadian-resident trusts to non-resident beneficiaries are generally subject to withholding tax at a rate of 25 per cent, unless a reduction is available under the Canada-US Tax Treaty. In addition, a non-resident of Canada is liable to pay Canadian income tax on capital gains arising from dispositions of ‘taxable Canadian property’, as defined in the Canadian Income Tax Act (ITA), with certain exceptions. Further, non-resident individuals may be required to file Canadian tax returns, including in certain situations where a non-resident individual has a taxable capital gain or disposes of taxable Canadian property during the year.
The appointment of a non-resident executor or trustee may impact the residence of the estate, or of trusts created under the will, for tax purposes. Under the ITA, a trust is considered to be a person and is, therefore, taxable if resident in Canada. The determination of residency will be made pursuant to the Canadian common law governing the residency of a trust. The leading case of Fundy Settlement v Canada held that a trust’s residency is to be determined based on the location of its central management and control. The residence of the trustee is only one factor. Therefore, where a US executor or trustee is appointed, or where a US protector or beneficiary exercises de facto control over the trust, the estate or trust could be resident in the US for tax purposes, giving rise to withholding tax and departure tax issues.
New 15 per cent property transfer tax
In 2015, British Columbia introduced a new tax payable by ‘foreign nationals’, ‘foreign corporations’ and ‘taxable trustees’ who acquire ‘residential property’ in the Greater Vancouver regional district. The rate is 15 per cent of fair market value, and is in addition to regular property transfer tax of up to 3 per cent. As a result, foreign buyers pay between 16 and 18 per cent tax on applicable transactions. This tax impacts cross-border planning in many ways.
A ‘taxable trustee’ is a foreign national or foreign corporation, or trustee of a trust in which, immediately after the registration of the transfer, a foreign national or foreign corporation holds a beneficial interest in the residential property. If a trust has a US beneficiary who is not a Canadian citizen or permanent resident, this tax must be considered when residential property is transferred to the trust. It will also apply if a surviving joint tenant is a ‘foreign national’, even though regular property transfer tax does not. Limited exemptions to this new tax are available. Transmission to executors and administrators does not attract the property transfer tax or the new foreign buyer tax.
Proposed changes to the principal residence exemption
Generally, the principal residence exemption (PRE) allows individuals, including personal trusts, to dispose of a principal residence at a reduced or nil capital gain. However, recently proposed changes would limit or eliminate the ability of certain trusts and non-resident individuals to use the PRE. This would have a significant impact on non-residents of Canada who hold Canadian situs real property. For instance, among other criteria, the trust beneficiary in respect of whom the PRE is being claimed must be a resident of Canada during the year for which the PRE is claimed, and must have a right to use and enjoy the property as a residence. This, among other amendments to the PRE, has obvious and significant impacts on cross-border planning.
Individuals and families holding property in trust (which would otherwise qualify as a principal residence) should review their trust terms and consider if and when such property should be transferred out of the trust. If enacted, the amendments will have retroactive effect to the announcement date of 3 October 2016 (although some of the changes are expressly made effective as of 1 January 2017).
Cross-border estate planning and administration is a complex area. Given the variation among Canadian jurisdictions, anyone seeking to make an effective cross-border plan involving a Canadian person or Canadian assets should consult with qualified professionals in each relevant province and territory.”