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2 KPMG LLP, an Ontario limited liability partnership and a member firm of the KPMG global organization of independent member firms
affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
Canadian residents who own certain US assets should be aware that you may be subject to
US estate tax upon death. These taxes, which can be significant, may arise if you own
property that is considered to be situated in the United States and meets other criteria. As a
result, if you determine that you may have a US estate tax exposure, you may want to
consider potential tax planning strategies to manage these costs.
In addition, because US estate tax rates and exclusions are subject to legislative changes, and the rates and
exclusion amounts change annually, it’s a good idea to periodically review your exposure to US estate tax to
ensure you make any needed adjustments and pass on more of your estate to the ones who matter most.
This slip-sheet provides an overview of US estate tax and highlights important considerations to keep in mind
when revisiting your estate plan. Note that the calculation of US estate tax is based on US estate tax rules,
which may differ from Canadian principles. Additionally, this article may not apply to US citizens or situations
in which one spouse is a US citizen and does not address potential state tax issues.
What assets are subject to US Estate Tax?
Generally, US estate tax applies at graduated rates on the fair
market value of a deceased’s “taxable estate.” To calculate the
value of this estate, individuals must consider certain assets
located or deemed to be located in the United States (or “US situs
assets”), less certain allowable deductions. These assets may
include:
– US real estate
– Tangible property located in the US (e.g., cars, boats,
furniture, artwork)
– Shares of public and private US corporations, regardless
of where the shares are held or traded
– Bonds and other debt issued by US corporations and
governments (except for certain bonds)
– US retirement plans and annuities (e.g., IRAs and
401(K) plans)
However, some assets are not considered US situs assets
for US estate tax purposes, such as:
– Shares and units in Canadian mutual funds and exchanged
traded funds (ETFs) that invest in US securities
– Personal US bank accounts (as long as these are not
connected to a US business)
– American depositary receipts (ADRs) where the underlying
shares are of non-US corporations
– US$ pay bonds from a Canadian issuer
– Shares of Canadian corporations
1
Note that the situs of a Canadian or US partnership interest is
uncertain.
Make deductions from asset value
In calculating your taxable estate, there may be certain debt and
expenses that you can deduct from the gross value of your US
situs assets. Some of these examples, which may have to be pro-
rated based on the ratio of US situs assets to worldwide assets,
include:
– Funeral and administrative expenses
– Amounts transferred to a “qualified domestic trust”
– A non-recourse mortgage on US real estate
– The deceased’s liabilities at the time of death (e.g.,
Canadian income taxes)
– State death tax
– Charitable donations
Canadians – Manage your
US
estate tax exposure
1
US securities are subject to US estate tax regardless of whether they are held in a Canadian registered account such as an RRSP, RRIF,
TFSA, RESP or RDSP. US securities are also subject to US estate tax if they are held in an Alter-ego Trust or Joint Partner Trust.
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2 KPMG LLP, an Ontario limited liability partnership and a member firm of the KPMG global organization of independent member firms
affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
Claim credits to reduce your tax bill
There may also be certain credits available under the Canada-
US Tax Treaty to reduce the resulting tax liability in the year of
death, including a unified credit, a marital credit and a Canadian
credit for US estate taxes.
Unified Credit
For 2023, Canadians may be eligible for a unified credit of up to
US$5.11 million that can be applied against a tentative US
estate tax liability. This credit effectively shelters US$12.92 million
of a taxable estate. The unified credit must be pro-rated based on
the ratio of US situs assets to worldwide assets as follows:
US Situs Assets x Unified Credit =
Prorated Unified Credit Worldwide Assets**
** The denominator is based on US estate tax principles and includes amounts
such as the value of life insurance proceeds and a principal residence.
Marital Credit
In addition, a “marital credit” is also available that can almost
double the unified credit if US property is transferred to a spouse
upon death. The marital credit is limited to the lesser of:
– The pro-rated unified credit, or
– Tax otherwise payable on qualified property transferred to
a spouse
Where individuals who are married and transfer all US property
to a spouse upon death, then no estate tax should be payable,
as long as the value of the deceased’s taxable estate is
US$23.98 million or less.
Note that where assets are jointly held, the first joint tenant to die
is deemed to own 100% of the property, unless the executor can
show that the surviving joint tenant paid for their share with their
own money. This rule applies to property held as joint tenants
with right of survivorship but does not apply to property held as
tenants in common.
Canadian Credit for US Estate Taxes
You may be able to apply a credit for US estate taxes paid
against your Canadian federal income tax on US source income
in the year of death. This credit includes gains on the shares
of US corporations.
2023 US estate tax exclusion thresholds
US estate tax is calculated at graduated rates (see the Appendix)
on the fair market value of an individual’s “taxable estate” as
follows:
US Situs Assets:
US$60,000
If the value of your US situs assets is
US$60,000 or less upon death, you are
not liable for US estate tax, regardless of
the value of your worldwide assets.
If the value of your US situs assets is
greater than US$60,000 upon death,
your estate must file a US estate tax
return, even if no tax is payable.
Worldwide Assets:
US$12.92 million
If the value of your worldwide assets is
US$12.92 million or less when you die,
you are not liable for US estate tax,
regardless of the value of your US situs
assets. You still must file a US estate tax
return to claim Canada-US treaty
benefits if the value of your US situs
assets is greater than US$60,000.
US Situs Assets &
Worldwide Assets
If the value of your US situs assets is
greater than US$60,000 and the value
of your worldwide assets is greater than
US$12.92 million, you may have a US
estate tax liability when you die. You
must file a US estate tax return to claim
Canada-US treaty benefits of the Treaty
and calculate your tax liability.
Note: The estate tax exclusion (and unified credit) will return to
pre-2018 levels beginning January 1, 2026. The exclusion
amount will be reduced to US$5.49 million (from US$12.92
million) (adjusted for inflation).
The US estate tax return (Form 706-NA), along with any estate
tax payable, must be filed nine months after the date of death
(although a six-month extension to file the return is available).
The deadline to pay estate tax can also be extended, but interest
accrues while the amount remains unpaid.
2
Note that the basis of property held at death is adjusted to fair market value for US income tax purposes even if no estate tax is payable.
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of independent member firms affiliated with KPMG International Limited, a private English company limited
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Managing US estate tax exposure
If you have determined that you may have exposure to US
estate tax, there are strategies available that may help you
potentially reduce, defer, eliminate, or fund this exposure.
In particular, you may want to consider implementing changes to:
– Keep your worldwide assets under US$12.92 million
(2023 amount)
– Split your worldwide assets with your spouse to maximize the
unified credit amount under the Canada-US Tax Treaty
– Use a Canadian corporation to acquire US assets
– Use a specially structured Canadian trust to acquire US
assets
– Use a Canadian limited partnership that elects to be treated
as a corporation for US tax purposes
– Amend life insurance policies
– Dispose of US assets prior to death
– Gift US assets prior to death
– Donate US assets to a US charity on death
– Use a Qualified Domestic Trust (QDOT)
– Create a trust for your spouse on death.
Contact your adviser
If you believe your estate has a US estate tax exposure, your
KPMG tax adviser can help you understand the latest changes
to the rules and determine whether you are eligible for
deductions and credits that could help reduce your liability.
In addition, your KPMG tax adviser can assist with reviewing
tax planning strategies that can ensure that your estate plan is
suitable to your needs for the years to come.
Contact us
Michael Pereira
Partner, Private Client –
Cross Border Tax
416-777-8769
mppereira@kpmg.ca
Tanzeela Ayub
Partner, Private Client
–
Cross Border Tax
416
-777-8983
Adrienne King
Partner, Private Client
–
Cross Border Tax
403
-697-6896
adrienneki[email protected]
Ryan Gill
Partner, Private Client –
Cross Border Tax
604-646-6472
ryangill@kpmg.ca
Nathan Kozak
Partner, Private Client
–
Cross Border Tax
519
-747-6571
Information is current to December 19, 2022. The information contained herein is of a general nature and is not intended to address the circumstances of any particular
individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is
received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of
the particular situation.
