Canadian dies with US property. treaty provisions - capital gain/estate/real estate - Canadian--Global tax help - david ingram e

XXXXX XXXXX on Saturday, June 13, 2009 at 14:59:50 --------------------------------------------------------------------------- My_question_is: Both question: My father passed away this year. He was a CND citizen with a summer home
in Washington State value of $700k US Cost base $ 300k USD (owned for 30 yrs).
 
Assuming the property is disposed of and is not a principle residence, 
what is the tax implications/rate on net gain in the US? 
 
Is their a CND credit? Is their a "death tax" in the US that applies? 

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david ingram replies:

UNITED STATES


The property is subject to US estate tax before it is sold if your father's total net worth at death is more than  You will have to file 706N  - that is something we can look after for you.

Any estate tax that is payable can also be a a credit against the deemed disposal tax in Canada.

The estate tax is only payable if the total estate is over $3,500,000  US.  If the  world wide estate i s less than  $3,500,000, there is no estate tax,

When sold later on, the property is subject to Capital Gains Tax.
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CANADA


At the moment of sale, the property is deemed to be sold at Fair Market value.

Depending upon the exchange rate, he will owe capital gains tax on one half of approximately $400,000 US dollars.

For Canadian purposes, you will need to calculate the sale and purchase prices at the exchange rate the day he bought the property and the date he died.

As I said before, any tax calculated for US estate tax will be a credit against the tax payable to Canada.

United States

When sold, there will be tax as well and this becomes a problem because of timing.

Using 2008 rates, the tax would be about $55,000.

Officially, Canada will allow up to 50% of this amount as a tax credit on the Canadian return.

However, there is another Treaty provision that needs to be taken into account and that is that under the US Canadian Tax Treaty, you can claim an exemption from US Tax up to Jan 1, 1985.

And, of course, if your mother and father owned this property together with one other house they lived in, the profit from date of purchase to Jan 1, 1982 is also tax free. There may also have been an adjustment on her death.

Lots of things to think about and very few people around who are old enough to remember these rules.

They may also, for Canadian Tax Purposes, have filed a T664 each in 1994.  this Canadian document allowed them to 'top up' their $100,000 each capital gains exemption.

I got to remind a client today (really - today) of this and we went back in our Computer records and found where he had $98,782.00 of declared capital gains from 1994 and this fact saved him a very real $22,000 of Canadian Income tax on the sale of two condos he bought in 1988 and sold in 2008. 

What is really fun is that he had used someone else for every year in between.

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this older question will give you some other insight.  pleases note that we are here to help you with the returns.

david ingram

taxman@centa.com: Please see bottom of message if you wish to unsubscribe.
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David

You mentioned an estate handout that did not make the printer for the Ozzie Jurock Seminar on Saturday and that you would mail it out to anyone who wanted one.

Please send mine to:
XXXX
XXXXXXXXX
Calgary XXXX
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david ingram replies:

I did not mean mail as in snail mail.  However the following is now being sent to your email address.

------------------------------------------------

Hi David,

Last night someone told me that if a Canadian resident dies owning assets in the US in excess of $60,000, then all his world assets are taxable by the IRS. I find that hard to believe.

Thanks for your help.

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david ingram replies

Yep, the answer or what you have heard is true if it is real estate or other capital assets.  In addition, if you die owning more than $1,199,999 of US stock and you have NEVER been to the US or even North America if you live in France or any of the other 260 odd counties in the world, your estate is subject to US estate tax. (I admit the $1,200,000 number may have changed and be higher or lower now but spent 1/2 an hour looking and could not find a change - if anyone reading this knows of a change, please let me know - its origins were in the 1995 changes to the tax treaty)

Very FEW Securities people know this.

*** Remember, that the gain is in US dollars in the US and Canadian Dollars in Canada.  When calculating the profit on the stock, you would use the Canadian / US exchange rate at the time of the purchase for cost and then use the rate at the time of death for the deemed disposal

So, when it comes to that second home in Palm Springs (as an example).

You bought it for $1,000,000 US on Sept 1, 1998  That would cost you (in Canadian Dollars)  $1,525,700 Canadian.

You died on Sept 1, 2008 and the property is now worth $1,400,000 US after going up to $2,000,000 US and then losing 30% in the last two years.

For US estate tax purposes, the property will represent $1,400,000 in your estate.

For Canadian tax, the $1,400,000 US was worth $1,489,740 and there would be a Personal Property Loss of $35,960 which can be used to offset gains on the Whistler ski chalet.

Hope this helps.
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The following older question will help you out a bit.
 
Hi David,
 
Is it true that a Canadian citizen, who owns a house in US, who is not a resident or a citizen of US may be subject to US estate tax on all property held upon death of that Canadian citizen?

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david ingram replies:

The answer is yes but no tax is paid on the Canadian Property  The value of the Canadian Property is used to determine the amount of US estate tax on US form 706N and then the figure is prorated.

For instance for 2008, there is no estate tax on amounts under $2,000,000  In 2009, there is no tax on amounts over $3,500,000.

Depending upon the election and who wins and who controls the congress and senate, Obama plans or proposes to freeze estates exemptions at $3,500,000 and have a graduated estate tax that caps at 45%.

McCain plans to raise the estate exemption to $5,000,000 and have a maximum estate tax of 15% much more desirable to those with money.  However, in 2007,

Today - if you die tomorrow, the limit is $2,000,000 and you are taxable on amounts over that.

Let's pretend that you have a $300,000 US property and die on November 1, 2008.

You are subject to estate tax on $1,000,000.

Pretend that the estate tax is exactly $345,800 on the $1,000,000 which exceeds the  $2,000,000 exemption.
 
Your estate tax would be $34,580 which is 10% of the estate tax because your US property is 10% of your total estate.

The good news is that the  $34,580 can be used as a foreign tax credit against  and capital gains tax owed by the estate on the property.

So, as an example.  If you died in November and you had paid $100,000 for the property, your estate would have a deemed disposal and there would be capital gains tax on the $200,000 profit on the property.

If the rest of your income in the year was $100,000, $100,000 would be added to your taxable income and your Canadian estate would owe about $40,000 (depending upon the province).  However, you would claim the $34,580 as a foreign tax credit against the $40,000 And your Canadian tax would be reduced by much, if not all of the $34,580 by using Canadian forms T2209 and T2036.

Warning - there is also an Estate Tax in most states.  Most use the Federal rates for exemptions, etc. but some start from scratch.


Hope this helps.
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This is not intended to be definitive but in general I am quoting $900 to $3,000 for a dual country tax return.

$900 would be one T4 slip one W2 slip one or two interest slips and you lived in one country only (but were filing both countries) - no self employment or rentals or capital gains - you did not move into or out of the country in this year.
 
$1,200 would be the same with one rental
 
$1,300 would be the same with one business no rental
 
$1,300 would be the minimum with a move in or out of the country. These are complicated because of the back and forth foreign tax credits. - The IRS says a foreign tax credit takes 1 hour and 53 minutes.
 
$1,600 would be the minimum with a rental or two in the country you do not live in or a rental and a business and foreign tax credits  no move in or out

$1,700 would be for two people with income from two countries

$3,000 would be all of the above and you moved in and out of the country.
 
This is just a guideline for US / Canadian returns
 
We will still prepare Canadian only (lives in Canada, no US connection period) with two or three slips and no capital gains, etc. for $200.00 up. However, if you have a stack of 1099, or T3 or T4A or T5 or K1 reporting forms, expect to pay an average of $10.00 each with up to $50.00 for a K1 or T5013 or T5008 or T101 --- Income trusts with amounts in box 42 are an even larger problem and will be more expensive. - i.e. 20 information slips will be at least $350.00
 
With a Rental for $400, two or three rentals for $550 to $700 (i.e. $150 per rental) First year Rental - plus $250.
 
A Business for $400 - Rental and business likely $550 to $700
 
And an American only (lives in the US with no Canadian income or filing period) with about the same things in the same range with a little bit more if there is a state return.
 
Moving in or out of the country or part year earnings in the US will ALWAYS be $900 and up.
 
TDF 90-22.1 forms are $50 for the first and $25.00 each after that when part of a tax return.
 
8891 forms are generally $50.00 to $100.00 each.
 
18 RRSPs would be $900.00 - (maybe amalgamate a couple)
 
Capital gains *sales)  are likely $50.00 for the first and $20.00 each after that.

Catch - up returns for the US where we use the Canadian return as a guide for seven years at a time will be from $150 to $600.00 per year depending upon numbers of bank accounts, RRSP's, existence of rental houses, self employment, etc. Note that these returns tend to be informational rather than taxable.  In fact, if there are children involved, we usually get refunds of $1,000 per child per year for 3 years.  We have done several catch-ups where the client has received as much as $6,000 back for an $1,800 bill and one recently with 6 children is resulting in over $12,000 refund. 

Email and Faxed information is convenient for the sender but very time consuming and hard to keep track of when they come in multiple files.  As of May 1, 2008, we will charge or be charging a surcharge for information that comes in more than two files.  It can take us a valuable hour or more  to try and put together the file when someone sends 10 emails or 15 attachments, etc. We had one return with over 50 faxes and emails for instance. 

This is a guideline not etched in stone.  If you do your own TDF-90 forms, it is to your advantage. However, if we put them in the first year, the computer carries them forward beautifully.

--
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