Why cross-border issues are a growing part of estate planning

Wealth transfers often aren’t just a matter of crossing generations, but borders. Many Canadians have built businesses in other countries, have vacation homes abroad or, if they’ve immigrated here, hold assets or own properties in their land of origin.
That challenges advisors and estate planners to help clients address tax and asset disposition implications that might span an array of jurisdictions.
“I would be hard-pressed to think of a situation working with clients where there wasn’t a related issue, whether it’s residency, citizenship, beneficiaries or assets. It’s just a foundational part of every conversation we seem to be having now,” says Nicole Ewing, director of tax and estate planning at TD Wealth in Ottawa.
Tax laws can be complicated, even more so when they involve cross-border ownership of financial securities and holdings, business and corporate assets, or property.
Real estate is perhaps the largest foreign-owned asset class held by individual Canadians, with the majority of those properties in the U.S. That’s becoming increasingly common. Since 2010, Canadians have purchased just less than 450,000 U.S. residential properties, according to Statista.
“More baby boomers now have properties outside of Canada that either will be passed down to children or sold. That next generation is also looking to diversify assets and not hold all of them in Canada,” says Julie Shipley-Strickland, senior wealth advisor with Wellington-Altus Private Wealth Inc. in Calgary.
Canada and the U.S. hold a tax treaty covering citizens of both countries, which stipulates treatment of asset sales, income taxation and other considerations. Most tax treaties provide for foreign tax credits that can applied to offset applicable Canadian taxes and other exemptions.
In the U.S., there are no annual tax implications to a Canadian who owns U.S. real property, including a vacation home, as long as it’s only for personal use and isn’t rented out. But Canadians who pass away owning U.S. property are subject to taxes.
For non-U.S. persons, an estate tax is levied on U.S. assets that exceed US$60,000, including real estate. However, one of the benefits of the Canada-U.S. tax treaty is it provides Canadian residents with potential tax credits that can reduce their U.S. estate tax liability.
A Canadian selling or gifting U.S. real estate may have to withhold and remit a percentage of the sale price (typically 15 per cent). But that tax can also be reduced through tax planning strategies, Ms. Ewing says.
“To the extent you are paying taxes, the goal is to get credit for having paid those taxes when it comes to doing your Canadian returns.”
Canadians holding assets of more than US$60,000 have an obligation to file an estate tax return in the U.S., even if they don’t owe any taxes on it. So, Canadian executors and beneficiaries need to be aware of possible delays in repatriating those assets.
“That can slow down the entirety of your estate being dealt with if your executor needs to wait for the [U.S. Internal Revenue Service] to issue a clearance certificate, which can take years,” Ms. Ewing says. “It says six to nine months on their website, but in our experience, it’s many times that.”
For many clients, it makes sense to leave those assets where they are, Ms. Shipley-Strickland says.
“Some people plan on travelling and or living a good chunk of their time overseas or in the U.S. or Mexico,” she says. “Do they necessarily want to bring assets back when they might be living in that country in retirement for three, four, five months of the year? That’s a very individualized answer.”
If the assets are sold and taxes paid in their home jurisdictions, the various tax treaties Canada has with affiliated countries likely means there is no double taxation. However, beneficiaries must be careful for other reasons, Ms. Shipley-Strickland says.
For example, a client receiving Old Age Security benefits could see them clawed back to zero if their income skyrockets because they have repatriated a large amount of asset proceeds. “There needs to be some planning around when and how that gets executed.”
While gifts from a foreign estate can minimize taxation, Ms. Shipley-Strickland notes that current guidelines place guardrails on how much can move before tax authorities may scrutinize the transfer.
The General Anti-Avoidance Rule allows the Canada Revenue Agency to assess taxes where a taxpayer follows the letter of the law but not “its object, spirit, and purpose causing a misuse or abuse of the Income Tax Act.”
“Talking to different cross-border professionals, and seeing what I’ve seen, a lot of people lean into around $100,000 as being the max. But it isn’t black and white. And as a rule, you generally can’t gift property,” she says.
Ms. Shipley-Strickland adds that clients should consult with a tax professional who handles these affairs to have a better understanding of what would be acceptable.
“The mechanics behind it depend on what country we’re dealing with, the type of asset and that person’s situation.”
The Society of Trust and Estate Practitioners is a resource for any client navigating matters related to cross-border assets. This global professional body comprises lawyers, accountants, trustees and other practitioners who specialize in inheritance and succession planning.
“No one should be going this alone, to the extent they have financial advisors, accountants, lawyers in this country and in the other,” Ms. Ewing says. “They should all be connected and co-ordinating with each other, and particularly the beneficiaries.”
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