Tax Insights: Estate tax update – US family members in the Canadian family-owned business (2016 edition)

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Issue 2015-56

If you have a family member who is involved in a Canadian family-owned business and is:

  • a US citizen or resident, or
  • a child who attends school in the United States

traditional Canadian wills and estate and tax planning may not be effective and could result in significant additional tax. This is the case even if you are not a US citizen. 

If you implemented an estate freeze, some or all of the growth in the value of your company accrues for the benefit of your family. This is usually achieved by having your spouse and children own shares of your company, either directly or through a family trust.

However, if any of these family members is or becomes a US citizen or resident, you may be faced with the following tax consequences:

  • A US family member who dies while owning the shares may be subject to US estate tax. The highest estate tax rate is 40% and is applied to the value of the shares owned at death that exceed the US$5.45 million lifetime exemption in 2016 (indexed annually). This tax may also apply if the US family member is a beneficiary of a family trust that owns the shares.
  • US gift tax may apply if the US family member gives the shares to another person.
  • US generation-skipping transfer tax may apply in addition to gift and estate tax if the US family member gives the shares to a person who is more than one generation younger (e.g. grandparent to grandchild).
  • The US family member may have to include a share of the company’s income in his or her personal US income tax return, even if the income has not been distributed from the company. In some cases, an additional tax or interest charge may be applied.
  • If the shares are owned by a Canadian family trust, US income tax may apply to distributions from the trust to the US family member, even if the trust has already been taxed in Canada on the income. An additional tax or interest charge may apply if the trust has been accumulating income and capital gains.