As families, investments and business interests increasingly span multiple countries, it is not uncommon for Canadian residents to have dual citizenship and property in several jurisdictions. Where a Canadian resident individual who holds dual Canadian-U.S. citizenship owns assets in several countries, multiple wills are often recommended, with a separate will for each jurisdiction administered by a local executor. This planning can simplify estate administration under local law and reduce certain tax and succession risks. However, due diligence by the Canadian executor is necessary to confirm segregation and separate administration of the property, and that the Canadian estate’s tax reporting is limited to the Canadian property. Before making any distributions, the tax consequences to any non-resident beneficiary should be considered.
How Do Multiple Wills Affect T3 Reporting?
Canadian courts have confirmed that a testator may validly use multiple wills to create separate pools of assets administered by different executors, provided that intention is clearly expressed in the documents.[1] However, for Canadian income tax purposes, the Canada Revenue Agency (CRA) takes the position that an individual has only one estate, encompassing all of the individual's worldwide property owned at death, regardless of how many wills or executors are involved.[2]
This means the Canadian executor cannot simply ignore assets governed by a foreign will. Before accepting or continuing an appointment, the Canadian executor should obtain every will and other testamentary instrument in the estate and obtain confirmation from local legal counsel in each relevant jurisdiction that:
- each will governs property only in the relevant jurisdiction;
- revocation clauses are appropriately limited, and each instrument acknowledges that the others remain in force;
- the foreign property vests exclusively in, and is administered by, the foreign executors; and
- the foreign executors are exclusively responsible for that property under local law.
Only where this segregation is confirmed should the Canadian executor limit T3 trust return reporting to the property governed by the Canadian will. The CRA has also stressed that "unfettered and complete communication" between the executors is essential,[3] including to coordinate the one-time designation of an estate as a graduated rate estate (GRE), since only one GRE designation is available across the entire estate no matter how many wills exist.
The Canadian Terminal Return Must Report Worldwide Assets
Regardless of how the estate is administered, where the deceased was resident in Canada immediately before death, the terminal T1 return must report the deemed disposition of worldwide property, including foreign assets governed entirely by foreign wills. The Canadian executor needs a description, ownership details, adjusted cost base, accrued income, and fair market value (in both local currency and Canadian dollars) for every foreign asset, regardless of who is administering such assets. Any foreign estate, inheritance, gift, or income tax liability on those assets should also be identified, since it may affect a Canadian foreign tax credit, or constitute a debt of the Canadian estate recoverable from Canadian assets.[4]
Monitor Testamentary Trust Status – How an Estate Can Lose GRE Status
A GRE must remain a "testamentary trust" throughout its existence.[5] A contribution to the trust from anyone other than the deceased, on or as a consequence of death, can cause the estate to lose that status, with consequences including loss of GRE status, loss of the basic exemption for alternative minimum tax, and a deemed year-end.[6] Executors should be alert to any arrangement, including loans, guarantees, or transfers involving beneficiaries or other non-arm's length persons, that could inadvertently trip this rule.
Distributions to Non-resident Beneficiaries Require Analysis
Where an estate has non-resident beneficiaries, Part XIII withholding tax can apply at 25% (subject to treaty reduction) to amounts paid or credited to them.[7] Ordinary capital distributions are generally exempt but gains on appreciated property distributed to a non-resident beneficiary in satisfaction of their capital interest may trigger withholding on the taxable portion of the gain,[8] unless the estate elects to have that gain taxed in the estate instead.[9]
Separately, a distribution of taxable Canadian property to a non-resident beneficiary can engage section 116 of the Income Tax Act (Canada), even though section 116 does not apply to the deemed disposition that occurs on death.[10] The CRA treats such a distribution as a purchase of the beneficiary's capital interest, making the estate liable to withhold 25% of the purchase price unless a clearance certificate is obtained or the interest qualifies as excluded property, including treaty-exempt property.[11] Failure to withhold or obtain a certificate exposes the estate and the beneficiary jointly and severally, to interest with no limitations period.[12] The estate may also be exposed to penalties.
Where a GRE no longer qualifies as such, Part XII.2 tax may also apply at the trust level on designated Canadian-source income distributed to a non-resident beneficiary, to ensure that income is not taxed only at the lower Part XIII withholding rate.[13]
Personal Liability for Distributions Without a Clearance Certificate
Separately from the tax considerations described above, an executor who distributes estate property before obtaining a clearance certificate may be personally liable for the unpaid taxes of the deceased or the estate, up to the value of the property distributed.[14]
Trusts for Mon-Resident Beneficiaries
If a beneficiary's interest is to be held in trust rather than distributed outright, the trust's residence must be analyzed. While a trust is generally resident where its central management and control is exercised,[15] a trust can also be deemed resident in Canada under section 94 of the Income Tax Act (Canada) where it has a "resident contributor" or a "resident beneficiary" connected to a contributor.[16] A deceased individual cannot personally be a resident contributor, but where an estate contributes property to a further trust, the estate becomes the contributor, and the deceased is treated as a joint contributor.[17] This can result in the new trust being a deemed resident of Canada for as long as it has a Canadian-resident beneficiary.
Practical Takeaways for Canadian Executors
- Before accepting or continuing an appointment, obtain every will, verify residence for potentially non-resident beneficiaries, and obtain full details of foreign assets.
- Engage local counsel in each jurisdiction to confirm that foreign property is exclusively under the local executor's authority.
- Coordinate early and often with foreign executors, particularly on any transactions that could jeopardize testamentary trust status.
- Before any distribution to a non-resident beneficiary, analyze the Part XIII, section 116, and Part XII.2 implications, and consider available elections.
- Before funding any trust for a non-resident beneficiary, conduct a separate section 94 residence analysis for that trust.
- File all required NR4 slips for amounts paid or credited to non-resident beneficiaries, and confirm whether any unresolved U.S. or other foreign tax liability could be treated as a debt of the Canadian estate.
- Obtain a clearance certificate before making any distribution, to avoid personal liability for the estate's or the deceased's unpaid taxes.
With the increasing mobility of people and capital, cross-border estates are increasingly common. Multiple wills raise technical issues that may not be apparent on the face of the documents. Early coordination between the Canadian executor, foreign executors and foreign counsel remains the most effective way to manage reporting obligations and optimize tax outcomes for the estate and beneficiaries.
