1. September 17, 2007 Cross-Border Estate Planning Issues Presented by: Greg Simpson, CA, CPA, TEP Steve Peters, CA, CPA, TEP

2. 2 Cross-Border Estate Planning Overview of US gift and estate tax Legislative uncertainty Treaty relief Impact on Canadians (non-US citizens) Focus on identifying issues, avoiding traps

3. 3 Overview US estate tax, gift tax and generation-skipping transfer (“GST”) tax form a unified transfer tax system –Estate tax is imposed on property transferred at death –Gift tax is imposed on property transferred during one’s life –GST tax is designed to ensure that property does not skip a generation without a transfer tax being assessed Executor is personally liable for unpaid estate and GST tax

4. 4 Overview US citizens and residents: –subject to gift, estate and GSTT on worldwide assets Non-resident aliens –subject to estate tax on assets situated in the US (“US situs property”) and subject to gift tax on tangible assets located in the US Resident = domiciliary Tax rates begin at 18 percent and increase rapidly to 45 percent

5. 5 US Estate Tax—Calculation Estate tax is levied on the fair market value of assets transferred on death Unified Credit _ Estate Tax Payable Estate Tax Payable = $ Estate % Progressive Tax Rate Deductions _ X

6. 6 Repeal of US Estate Tax ? In 2010, the estate tax will be completely repealed No repeal of the gift tax is planned In 2011, the repeal sunsets. That is, unless there is new legislation in the intervening period, the law will revert back to legislation in effect for 2001 Democratic Congress

7. 7 Estate and Gift Tax

8. 8 Estate and Gift Tax Rates

9. 9 Decision Tree YES NO YES NO YES NOESTATETAX US citizen or US resident ? Subject to estate tax on US situs assets Subject to estate tax on worldwide estate Value of worldwide estate > estate tax exemption? Hold US situs assets ? Value of worldwide estate >estate tax exemption?

10. 10 Is Your Client a US Resident (Domiciliary)? The Residency Test—is your client a US resident (domiciliary) for US estate tax purposes? –A resident is an individual who has his domicile in the US at the time of death. A subjective test—quite different from the (objective) substantial presence test to determine residency for US income tax purposes Green card holders (lawful permanent residents) are often presumed to be domiciled in the US

11. 11 Gross Estate US Citizens and Domiciliaries The gross estate includes the value of all property in which the decedent had an interest at the time of death Life insurance proceeds will also form part of the decedent’s gross estate if the estate is a beneficiary of the insurance proceeds or the decedent had possessed certain economic ownership rights or “incidents of ownership” in the policy

12. 12 Gross Estate Non-Residents of the US The taxable estate will include property situated within the US –Real property located in the US –Certain tangible property located in the US –Shares of US corporations –Debts of US persons including the US government (not including portfolio debt) –Interests in partnerships carrying on business in the US –US pension plans and annuities including IRA and 401(k) plans –Look through rules for certain foreign trusts –RRSPs

13. 13 Gross Estate Non-Residents of the US The following assets will not be included in the taxable estate: –Shares of non-US corporations –US bank deposits –Portfolio debt obligations –Life insurance proceeds

14. 14 Allowable Deductions US citizens and domiciliaries: –Funeral expenses –Estate administration expenses –Debts of the decedent –Mortgages and liens –The marital deduction –Charitable donations Non residents of the US: –Deduction is prorated by the ratio of the value of US situs assets to the value of the worldwide estate

15. 15 US Estate Tax Credits Non-resident aliens are allowed a standard credit (under US domestic law) of US$13,000 against estate tax otherwise payable, which exempts US situs estates of US$60,000 or less If US taxable estate is less than $60,000, it is not necessary to file Form 706NR with the Internal Revenue Service

16. 16 US Estate Tax for Canadians Canada – US Treaty provisions for Canadians. –US Relief Enhanced Unified Credit Special Marital Credit Small Estates Exemption –Canadian Relief Credit for US estate tax –No Relief For US Gift Tax GSTT

17. 17 Treaty Relief – Unified Credit Article XXIX-B(2) Applicable to Canadian residents who are not US citizens Pro rata share of unified credit available to US citizens, based on: (US assets) / (Total assets) Effect: if total assets do not exceed estate tax exemption ($2,000,000 for 2007), no US estate tax

18. 18 Treaty Relief – Marital Credit Article XXIX-B(3) For property passing to spouse or spousal trust In addition to, and limited by, unified credit otherwise available: Maximum marital credit = Unified credit X 2 Effect on death in 2007, if all property passes to surviving spouse or qualifying spousal trust: –Eliminate US estate tax if assets of decedent don’t exceed approximately $3.7M.

19. 19 Treaty Relief – Foreign Tax Credit Article XXIX-B(6) Applies to Canadian individuals and subs. 70(6) spousal trusts Credit against Cdn death tax for US estate tax on US-situs property No relief if no appreciation in value Does not apply to alter ego or joint partner trusts (Treaty rules predated Cdn legislation) Does it apply to US property held in RRSP?

20. 20 US Estate Tax Example—Facts $10,000,000 Non-US assets $ 2,000,000 US stock portfolio $ 2,000,000 US residence $ 500,000Mortgage on US residence $ 50,000Funeral expenses All amounts are in US dollars

21. 21 US Estate Tax Example US Person Gross estate = $14,000,000 Deductions (expenses) Mortgage $ 500,000 Funeral $ 50,000 100% $ 550,000 Taxable estate = $13,450,000 $13,450,000 x Tax Rate= Base Tax $ 6,276,800 Unified credit$ 780,800 Tax payable$ 5,496,000

22. 22 US Estate Tax Example Canadian Person Gross estate (US situs assets) = $4,000,000 Deductions (expenses) Mortgage $ 500,000 Funeral $ 50,000 $ 550,000 $ 4,000,000 US Situs = 30% $13,450,000 Worldwide $ 165,000 Taxable estate= $3,835,000 $3,836,430 x Tax Rate % Base Tax = 1,661,600 Unified credit (30%) 234,240 Tax payable $1,427,360

23. 23 Canadian Ownership of US Real Property Individual Ownership –Low individual income tax rates Maximum 15 percent (long-term) federal capital gains rates No individual income tax in the State of Florida –High US estate tax Foreign Corporate Ownership –Canadian shareholder benefit problems –US corporate income tax rates 34 percent federal plus state income tax –No US estate tax

24. 24 Canadian Couple Where One is US Citizen If US citizen dies first: limited marital deduction –Consider Qualified Domestic Trust If non-US citizen dies first: minimize assets included in estate of US citizen –Consider testamentary spousal trust which does not create “power of appointment” for US purposes

25. 25 Power of Appointment For US estate tax purposes, assets of a trust are included in estate of a person who has certain powers, including: –power to invade principal –power to determine to whom assets pass Does not apply if power is limited by “ascertainable standard” –support in accustomed manner of living –maintenance in health and reasonable comfort –Canadian Spousal testamentary trust must meet this standard to avoid estate tax inclusion

26. 26 Power of Appointment - Scenario X establishes trust. Y is an income beneficiary with power to determine in her will to whom assets shall pass. Y exercises this power. Trust owns US assets at time Y dies. Inclusion in Y’s estate for US estate tax purposes: –If Y is US citizen or resident: all assets of trust –If Y is not US citizen: US assets of trust Double tax: –Because Y is not subject to Canadian death tax on these assets, no foreign tax credit for US estate tax.

27. 27 Children in US Important to ensure basis step-up on death –Otherwise, double taxation will arise –For spousal or joint partner trust, basis step-up not automatic but can be accomplished with planning (via power of appointment) Special issues re: investment holding company –Repeal of US Foreign Personal Holding Company rules removes some obstacles –Many complexities remain –Consider NSULC

28. 28 Inheritance from US Revocable Trust US residents typically hold investments in a revocable trust –Purpose: to avoid probate –Trust also serves as estate planning vehicle (will substitute) For US tax purposes: On death, assets are included in gross estate (because of power of appointment) –Therefore, receive basis step-up

29. 29 Inheritance from US (cont’d) If beneficiary is Canadian resident: –No basis step-up under ITA –Double tax if receive trust assets and sell Consider: –Trust sells assets shortly after death –Trust distributes cash in following year (as capital) Beneficiary taxable on trust’s income as became payable to the beneficiary in year (ITA 104(13)(a)) –Did beneficiary have right to enforce payment in year trust sells assets (ITA 104(24))?

30. 30 Alter Ego & Joint Partner Trusts If trust is revocable, US assets will be included in estate of decedent –power of appointment No foreign tax credit on T3 return for US estate tax Moral: don’t hold US-situs assets in these trusts!

31. 31 US Gift Tax Citizens and Domiciliaries Imposed on all transfers of property made during lifetime –Based on fair market value of assets transferred –Exemption of $12,000 per year per donee (indexed to inflation and rounded down to the nearest $1,000) –Lifetime gift tax exemption is $1,000,000 (not indexed) –To the extent that the lifetime gift tax exemption is used, there will be a corresponding reduction in the unified credit Marital exemption –Unlimited gifts to a US citizen spouse –Exemption of $125,000 per year to non-US citizen spouse (indexed to inflation)

32. 32 Is Your Client a US Citizen? US citizenship must be formally renounced to be terminated –Renunciation requires filing prior year tax returns Freeze / Corporate Reorganizations

33. 33 Greg Simpson, CA, CPA, TEP Partner - Tax Steven Peters, CA, CPA, TEP Director, International Tax KPMG LLP 1959 Upper Water Street, Suite 1500 Halifax, NS B3J 3N2