Tax Insights – Estate tax update: US estate tax exposure for US citizens living in Canada

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Issue 2014-07

If you are a US citizen living in Canada, you may be subject to both the Canadian and US tax regimes at your death. All dollar amounts in this Tax Insights are in US currency unless otherwise noted.

As a Canadian resident, you are subject to Canadian income tax at death. As a US citizen, you are subject to US estate tax on the fair market value of your worldwide estate at the time of your death. Your worldwide estate includes all property owned at death — regardless of where the property is located — even:

  • life insurance proceeds, if you own the policy or if the proceeds are payable to your estate
  • certain property transferred within three years of death
  • registered plans (e.g. registered pension plans, registered retirement savings plans and registered retirement income funds)
  • certain trust interests
  • stock options

US citizenship status is not always clear. For example, while an individual will be granted US citizenship by virtue of being born in the United States, an individual may also be a US citizen if he or she is born outside of the United States to a parent who is a US citizen. You should consult an immigration lawyer if you are unsure about your status.

The US estate tax rate starts at 18% and climbs to 40% when the value of your estate reaches $1,000,000. As a US citizen, you are entitled to a lifetime estate tax exemption. The estate tax exemption is $5.34 million (indexed annually), unified with the gift tax exemption. This means that, as long as no portion of the exemption was used towards gift tax, no estate tax is payable if your worldwide estate is valued at less than $5.34 million (indexed annually).

On death, for Canadian income tax purposes, you will be deemed to dispose of your capital assets for an amount equal to their fair market value on the date of death. As a result, you may pay capital gains tax in Canada.