In increasing numbers, Canadian citizens and residents are purchasing U.S. vacation homes. In counselling these “snowbirds” it is important that the advisor keep several tax and non-tax-related issues in mind, namely probate & incapacity, medical care and insurance coverage, U.S./Canadian income tax and U.S. estate tax.
The following will focus on the U.S. estate tax consequences of owning U.S. real property by Canadian snowbirds. However, the other issues mentioned above should not be forgotten and may occasionally outweigh the importance of the U.S. estate tax.
U.S. estate tax basics
The gross estate for a non-resident non-citizen such as a Canadian snowbird is comprised solely of U.S. situs assets that would be included in such decedent’s estate under general estate tax rules. The gross estate tax value is reduced by various deductions to arrive at a taxable estate.
Under the U.S.-Canada income tax treaty, the exemption for Canadian citizens and residents is a taxation of the basic exemption ($5.34 million for 2014) multiplied by a fraction of which the numerator is the gross value of the U.S. situs assets and the denominator is the gross value of the decedent’s worldwide estate (determined, solely for these purposes, as though the Canadian decedent were a U.S. citizen). The estate tax rate is a progressive rate, which starts at 18 per cent and rises to 40 per cent for a taxable estate exceeding $1 million.