U.S. citizens living in Canada need to be alert to the Trump administration's Repeal of the Death Tax
This briefing is intended for individuals that could be impacted by this repeal
With the recent election of President Trump and with the Republican Party taking control of both the House of Representatives and Senate, Canadians - business owners and individuals alike - have begun to consider the implications to them of the next four years of a Trump administration. One of the first developments of interest is the introduction of the Death Tax Repeal Act of 2017 on January 24, which calls for the repeal of the U.S. estate tax, or as it is often called, the "death tax".
The proposed legislation could affect a large number of people in Canada. Under the current rules, U.S. estate taxes are imposed on the worldwide estates of U.S. citizens wherever they reside. By some estimates, there are approximately 1,000,000 U.S. citizens residing in Canada. In addition, Canadian citizens who own "U.S. situs property" at the time of their death are subject to the U.S. estate tax regime based on the proportion that their U.S. situs property represents of their worldwide estate. The most common forms of U.S. situs property are U.S. real property (including vacation homes owned by "snowbirds") and stocks of U.S. corporations that are directly owned by an individual. Finally, there are a number of individuals who were born outside the U.S. but who reside in Canada who may qualify as U.S. citizens for purposes of the rules, if one or more of their parents are U.S. citizens by birth. These individuals are sometimes referred to as "Accidental Americans".
Until 2013, the U.S. estate tax rules were in a relative state of constant flux, both in terms of personal exemption amounts and the rate of tax. Since 2013, the U.S. estate tax rules have imposed a 40% tax rate on estates above a set exemption amount. The current exemption amount for a U.S. citizen is just under $5.5 million (or just under $11 million for a couple, both of whom are U.S. citizens.)
Unlike Canadian taxes which may apply on death, the U.S. estate tax is a tax on the fair market value of an asset. The amount paid for an asset is not considered when calculating the estate tax.
It remains to be seen if the proposed law will be finally enacted. However, given the legislation was introduced in the Senate and the House of Representatives, both under Republican control, there is a strong likelihood it will become law. If it does, we will likely be witnessing the permanent demise of "death taxes" in the United States, since it is uncommon for a subsequent government to re-enact a tax law that has been fully repealed.
The upshot is that while there may be other actions taken by the Trump administration that prove to be troubling for Canadians, the proposed repeal of the U.S. estate tax would be a positive development for dual U.S. - Canada citizens, or residents of Canada who own U.S. situs property.