Tax Insights: How a Biden administration could impact Canadian taxpayers
December 14, 2020
Issue 2020-44
In brief
With the US Electoral College casting their votes today, Joseph R. Biden is expected to become the 46th President of the United States in January 2021. However, it is not yet known which political party will control the US Senate. Canadian taxpayers should be aware of how the results of the 2020 US election could impact their cross-border tax situation.1
All amounts in the Tax Insights are in US dollars
In detail
Key estate tax proposals in President‑elect Biden’s tax plan that affect US citizens living in Canada and Canadians who own US assets, are discussed below.
US citizens living in Canada — US federal estate and gift tax
President-elect Biden’s tax plan proposes significant changes to the US estate and gift tax regime, as follows:
- lowering the US estate and gift tax exemption from $10 million (indexed to $11.58 million for 2020) to $3.5 million
- increasing the highest marginal US estate tax rate from 40% to 45%
US citizens living in Canada that are Canadian residents for tax purposes are subject to Canadian income tax at death. US citizens will also be subject to US estate tax on the fair market value of their worldwide estate at the time of their death. A US citizen’s worldwide estate includes all property owned at death, regardless of where the property is located. All property includes life insurance,2 registered plans (such as registered retirement savings plans [RRSPs] and registered retirement income funds [RRIFs]), certain trust interests and stock options.
Current US estate tax rules
The US estate tax rate starts at 18% and climbs to 40% when the value of the estate reaches $1 million. US citizens are entitled to a lifetime estate tax exemption. The Tax Cuts and Jobs Act (2017) doubled the lifetime estate tax exemption amount to $10 million,3 indexed to $11.58 million for 2020. This means that, provided no portion of the exemption was used to shelter lifetime gifts, no estate tax is payable if the value of the worldwide estate does not exceed $11.58 million in 2020. For married couples, who are both US citizens, this amount is doubled to $23.16 million for 2020.
US citizens cannot avoid US estate tax by giving away their assets during their lifetime, because the US imposes a gift tax on lifetime transfers. The gift tax is unified with the estate tax, so that the gift tax is imposed at the same rate as the estate tax and provides the same $11.58 million exemption for 2020.
What to do before the end of the year
Although it is not clear if President-elect Biden’s proposed tax changes will be enacted, planning now can help reduce the possibility of paying additional US estate tax in the future. US citizens living in Canada that have exposure to US estate tax should consider:
- making lifetime gifts before December 31, 2020, to take advantage of the higher gift tax exemption, which could be significantly reduced under the Biden administration; an individual gifting or transferring certain assets to the next generation or their Canadian citizen spouse could achieve significant estate tax savings (e.g. the difference between the 2020 gift tax exemption of $11.58 million and the proposed $3.5 million exemption is $8.08 million, which using a marginal tax rate of 45%, results in the taxpayer saving $3.6 million of US estate tax)
- revisiting any plans to carry out an estate freeze before December 31, 2020, depending on certain factors
- reviewing the individual’s will and estate planning strategies, including bequests to a spouse and family members
- evaluating the individual’s current structuring of insurance policies and potentially acquiring insurance using their gift tax exemption to fund the policies
Canadians who own US assets— US federal estate tax
Canadian residents who are not US citizens may be subject to US estate tax if they die owning certain US assets, such as shares of US corporations, US real estate and US business assets. Currently under the Canada-US Tax Treaty, Canadian residents have a US estate tax liability only if their worldwide assets are valued at more than $11.58 million for 2020.
However, under President-elect Biden’s proposed tax plan, this will no longer be the case, and Canadians owning certain US assets will have a US estate tax liability if their worldwide assets are valued at more than $3.5 million.
What to do before the end of the year
This proposal could be a significant change in US federal tax legislation and have a far-reaching impact on many Canadian resident investors who are not US citizens. Canadians who already own, or are looking to purchase certain US assets should consider cross-border tax planning to reduce their US estate tax exposure in light of potential tax changes proposed by a Biden administration.
US estate tax is generally higher than Canadian tax
On death, Canadians who own US assets are subject to Canadian tax on any accrued gain on the US assets and are also subject to US estate tax on the full value of the assets. A Canadian federal foreign tax credit may be claimed for any US estate tax paid on the US assets. As a result, an individual will generally pay the higher of the two taxes. Currently, because the Canadian tax rates on capital gains are significantly lower than the top US estate tax rate, Canadian individuals will likely pay tax at the US estate tax rate. Also, note that the Canadian provinces and territories do not generally allow a foreign tax credit to be claimed for US estate tax paid; therefore, the deceased may be subject to some double taxation.
Filing an estate tax return
If the deceased’s US assets exceed $60,000, a US estate tax return must be filed, even if the deceased does not owe any US estate tax. The US estate tax return should include a statement claiming treaty benefits under the Canada-US Tax Treaty. Be aware that, in certain cases, transfer agents will not agree to transfer US investments from the deceased until the deceased’s estate can provide proof of clearance from the Internal Revenue Service. The filing deadline for a US estate tax return is nine months after the date of death.
Other proposed tax changes
President-elect Biden’s tax plan also proposes to tax unrealized capital gains exceeding $100,000 at death or by gift, other than to a US spouse or charity.
The takeaway
Although it is uncertain whether President-elect Biden’s estate tax proposals will be enacted, Canadian taxpayers with US connections should still be aware of how these proposals could impact their cross-border tax situation, and plan for the possibility that they may get enacted.
2. If the individual owns the policy on their own life or if the proceeds are payable to the individual’s estate.
3. This enhanced exemption is effective only from 2018 through 2025; unless permanent legislation is enacted, the exemption will return to the pre-2018 regime in 2026. The Internal Revenue Service and United States Department of the Treasury clarified in Treasury Decision 9884 (November 26, 2019) that individuals who take advantage of the increased exemption amount from 2018 to 2025 will not lose the tax benefit of the higher exemption amount after 2025 when it is scheduled to drop to pre-2018 levels.
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