Canadian Citizens Living in the US
Canadian citizens living in the US need proper Wills. Canadian citizens are increasingly purchasing properties in the United States, Mexico and Caribbean locations and moving down south for extended periods of time, many becoming U.S. residents or residents of Mexico while not necessarily giving up their Canadian citizenship. This can have significant estate tax and administrative implications, particularly if the non-resident Canadian citizen dies intestate or does not have a Will that specifically addresses his or her Canadian assets. Canadian and U.S. tax systems have distinct estate and administrative laws, and navigating these systems can be especially complicated, expensive and time consuming for Canadians with assets in multiple jurisdictions. This post underlines the conflict issues that arise in respect of tax laws and estate administrative issues when a Canadian citizen dies while domiciled abroad, particularly when such a deceased was intestate with respect to assets held in Canada.
CANADIAN CITIZENS LIVING IN THE UNITED STATES
Each year, over one million Canadians seniors or retirees travel south to the U.S.to escape Canadian the winter. Although it is presumed that a person’s domicile is their place of birth, that presumption is rebuttable and the amount of time Canadians spend in the U.S. can lead them to becoming U.S. residents, either intentionally or unintentionally. U.S. Code Section 301.7701(b)–1(b) provides rules for determining whether an alien individual is a lawful permanent resident of the U.S. More particularly, Section 301.7701(b)–1(c) provides rules for determining if an alien individual satisfies the substantial presence test. Section 301.7701(b)–2 provides rules for determining when an alien individual will be considered to maintain a tax home in a foreign country and to have a closer connection to that foreign country.
Ina similar vein, Article IV, Section 1 of the Canada-US. Tax Treaty defines the term “resident” as “any person that, under the laws of that State, is liable to tax therein by reason of that person’s domicile, but in the case of an estate or trust, only to the extent that income derived by the estate or trust is liable to tax in that State, either in its hands or in the hands of its beneficiaries”. Article IV further provides that “an individual who is nota resident of Canada under this paragraph and who is a U.S. citizen or an alien admitted to the U.S. for permanent residence… is a resident of the United States only if the individual has a substantial presence, permanent home or habitual abode in the U.S., and that individual’s personal and economic relations are closer to the U.S. than to any third State.”
The substantial presence test provides that an individual is a resident alien if he or she has been physically present in the U.S. on at least 183 days during a three-year period, including the current year. An individual shall be treated as present in the U.S. on any day that he or she is physically present in the U.S. at any time during the day. For purposes of this test, each day of presence in the current year is counted as a full day in which the individual is physically present in the U.S.; it does not include, for example, travel through the U.S. during which the individual spent under 24 hours in the US as a layover.
However, under section 301.7701(b)–2, an alien individual who meets the substantial presence test may still be considered a non-resident alien for the current year if (1) the individual is present in the U.S. for fewer than 183 days in the current year; (2) the individual maintains a tax home in a foreign country during the current year; and (3) the individual has a closer connection during the current year to a single foreign country in which he or she maintains a tax home than to the U.S.
Many Canadian citizens with properties in Florida who spend a lot of time there satisfy the substantial presence test and are therefore U.S. resident under Section301.7701(b)–1(c). In general, U.S. resident aliens are generally taxed in the same way as U.S. citizens. This means that their worldwide income is subject to U.S. tax and must be reported on their U.S. federal income tax return and is subject to the graduated tax rates capped at just under 40% as per the U.S. Internal Revenue Code, Chapter 1 Section 1. Perhaps most importantly for the purposes of this paper, a Canadian citizen who resides in Florida and becomes a U.S. resident and is no longer a Canadian resident will be classified as a U.S. person for the purposes of estate taxes and estate administration purposes.
CANADA-US TREATY TAX TREATY AND ESTATE LAW IMPLICATIONS
The Canada-US Tax Treaty provides some relief for Canadians who become U.S. residents against double taxation for estate administration purposes. Article XXIV of the Treaty specifically eliminates double taxation between the two while XXIII B explicitly addresses estates taxes imposed by reasons of death for Canadian and U.S. residents and citizens. As such, U.S. residents with Canadian assets will, generally speaking, only be subject to U.S. probate tax. Articles VI through XXIII of the Treaty addresses various targeted income sources, including real property (VI), business property (VII), dividends (X),interest (XI), royalties (XII), gains (XIII), pensions and annuities (XVIII),and capital (XIII), which includes real property owned by a U.S. or Canadian resident.
It should be noted that the Trump Administration amended the Canada-U.S. Tax Treaty in 2017 to give Canadian residents extra protection from the U.S. estate tax by increasing the tax credit for Canadian residents. This sunset clause is being examined by the Biden Administration and in any event is set to expire in 2025. If the Canadian resident’s entire worldwide assets do not exceed $11.2 Million Dollars USD, he or she will not have estate tax payable on U.S. situs assets. The Treaty also provides that the estate tax exemption for a Canadian can be doubled when property is left to a surviving spouse.
Nevertheless, as discussed in more detail below, this potential tax exemption does not apply for non-resident Canadian citizens. Moreover, while ceasing to be a Canadian resident means that you will no longer be taxed in Canada on your worldwide income, Canada will still retain the right to tax certain Canadian assets after cessation of Canadian residence. In short, a non-resident Canadian citizen needs to be vigilant in their tax planning or be potentially liable for interstate taxes specified in the Treaty in addition to estate taxes in the U.S. and estate administration taxes in Canada.
COMPLICATIONS IN ESTATE ADMINISTRATION FOR ONTARIO ASSETS
An estate trustee dealing with the estate of a non-resident Canadian will need to consider tax implications due to the deceased's Canadian citizenship, however, they will be encouraged to know Canada does not tax based on citizenship or levy a general estate tax on its citizens' estates as is common in other jurisdictions. On the other hand, the beneficiaries of a U.S. resident with assets in Ontario can encounter numerous administrative hurdles to dispose of the Ontario assets, particularly if the Willis silent as to the executor and disbursement of the Ontario assets, or if the executor of the Will is a non-resident of Ontario. Such a situation is likely the case for non-residents with Florida Wills since, in Florida, the probate process requires that the deceased executor be either be his or her spouse or another relative or be a resident of Florida. Unrelated non-resident executors are therefore not eligible to apply for a Florida probate grant without exceptional circumstances. Intestacy or incomplete Wills can therefore lead to probate fees and costly administrative procedures to allow for executors and trustees to be properly appointed and entitled to act.
To add to the complications, in Ontario, if the deceased’s executor or trustee is also de facto a non-resident, Section 5 of the Estates Act R.S.O. 1990, c. E.21 (the “Estates Act”) provides that letters of administration shall not be granted to a person not residing in Ontario unless, pursuant to Section 6, the person has given security as is required from an administrator in the case of intestacy or in the opinion of a judge security maybe dispensed with. Required security in the case of intestacy is a bond. This bond, specified in section 35 of the Estates Act, must be twice the value of Ontario assets, unless a judge reduces or otherwise strikes out the need for a bond pursuant to Section 37 of the Estates Act.
While the Ontario courts have discretion to set aside the bond, the mere requirement for one to begin with is a complicating factor executors must contend with. An executor can make a motion for an order to set aside the bond, for which success includes consent from all of the beneficiaries (who must all be adults) and an affidavit stating that all debts have been paid. These motions are typically granted, and bonds are generally set aside, if the courts are satisfied that the beneficiaries are adult, mentally capable and consent to the order, and where the court is satisfied that all debts of the estate have been or will be paid.
If the non-resident Canadian citizen is intestate, further complications arise in regard to administering his or her Ontario assets. Notably, Section 26 of the Estates Administration Act R.S.O. 1990 c.E.22 provides that “no distribution shall be made on an intestacy until after one year from the death of the intestate”. While this rule can also be varied, it is also not without complication and is also subject to section 53 of the Trustee Act R.S.O. 1990, c. T.23. Thus, once again, with respect to the administration, the bond requirement will require consideration by an executor in the course of their administration.
Thus, in addition to the residency of the grantor, the residency of the executor also has practical legal and tax implications of consequence. A non-resident will need to devote more time and expense to navigate Ontario’s probate laws to administer the estate. Of course, the means for doing so are also outlined in Ontario’s Rules of Civil Procedure. To expound upon the discussion to this point, and subject to a few exceptions such as what has been outlined, the non-resident will have to get a certificate and a bond from the Ontario courts to administer the Ontario pursuant to rule 74.05.1 (1) and 74.11(1) of the Ontario Rules of Civil Procedure.
Further complication arises for non-residents Canadian citizens owning taxable Canadian property under the Income Tax Act R.S.C. 1985 c. 1 (the “Income Tax Act”).Section 2(3) of the Income Tax Act provides that an income tax shall be paid by non-residents on the taxable income if the individual was (a) employed in Canada, (b) carried on a business in Canada, or (c) disposed of a taxable Canadian property in Canada. Moreover, transferring these assets to non-residents may result in further tax obligations. Undersection 116 of the Income Tax Act, there may be filing requirements or the necessity to obtain a clearance certificate each time a distribution is made to a beneficiary who is not a resident of Canada for income tax purposes.
ESTATE ADMINISTRATION LAWS: FLORIDA VS ONTARIO
If the non-resident Canadian citizen is a Florida resident and his or her Will is silent on the distribution of Canadian assets, he or she may be subject to the intestate asset distribution procedure found in Part I, Chapter 732 of Florida Statutes. This chapter provides that if the decedent died intestate, his or her assets will be distributed in the following manner:
If the decedent was survived by a spouse but left no living descendants, the surviving spouse receives all of the decedent’s probate estate.
If the decedent was survived by a spouse and left one or more living descendants (all of whom are the descendants of both the decedent and the spouse), and the surviving spouse has no additional living descendants (who are not a descendant of the decedent), the surviving spouse receives all of the decedent’s probate estate.
If the decedent was survived by a spouse and left one or more living descendants(all of whom are the descendants of both the decedent and the spouse), but the surviving spouse has additional living descendants (at least one of whom is not also a descendant of the decedent), the surviving spouse receives one-half of the probate estate, and the decedent’s descendants share the remaining half.
In contrast, Section 44 and 46 of the Succession Law Reform Act provides that:
If a person dies intestate in respect of property and is survived by a spouse and not survived by issue, the spouse is entitled to the property absolutely.
If the decease is intestate and leaves a spouse and one child, the spouse is entitled to one-half of the residue of the property after payment under section45, if any.
If the decease is intestate and leaves a spouse and more than one child, the spouse is entitled to one-third of the residue of the property after payment under section 45, if any.
If a child has died leaving issue living at the date of the intestate’s death, the spouse’s share shall be the same as if the child had been living at that date.
While both Ontario and Florida estate laws provide that only the spouse and blood relatives (children) are entitled to the estate, there are nuances between each jurisdiction with respect to the definitions of and therefor proper distributions for same. These differences in estate distribution between the spouse and the surviving children can complicate the equitable transfer of the deceased’s assets and can also lead to costly court proceedings if a challenge to a transfer is made.
A final consequence of failing to address Ontario assets in a Florida Will to be examined in this post is that the assets might be subject to additional probate fees and taxes. Canada does not currently impose estate taxes, however, capital gains incurred during the lifetime of a taxpayer are subject to tax on death. If the Florida Will does not deal with the Ontario assets, the estate will bear the responsibility for the Ontario probate tax as well as the capital gains all of which will subtract from the value of the estate. Moreover, the Florida Probate Code, Chapters 731 through 735, imposes taxes on the value of all assets, and under Florida estate statutes, probate may cost up to 3% of the value of the estate upon death. Thus, the estate will incur probate taxes in both jurisdictions. Creating across-border trust can be an effective means to curtail these probate fees, although that is a subject matter for another paper.
In conclusion, a Canadian citizen from Ontario who becomes a Florida resident and omits to properly address his or her Ontario assets in their Will may encounter many complications. These complications can be time-consuming and costly to deal with, and result in undue hardship for the beneficiaries of the estate. In addition, it may cause unintended complications for the executors. For example, it may require the appointment of an executor in Florida or Ontario as the case may be if they are not exempted from doing so under the relevant estate law. Even worse, if there is no Will, the beneficiaries might be subject to different intestate rules that might not reflect the desires of the deceased or even lead to litigation if there is an objection to the distribution of assets. Lastly, dying intestate or omitting certain assets in a Will might lead to unnecessary probate fees and taxes. It is therefore advised that Florida residents with Canadian citizenship address their Ontario assets in an Ontario Will that is coordinated with their Florida Will or better yet create a cross border trust that compliments their Florida Will and their Ontario Will. In the end, careful planning with qualified professionals would be advised to allow the best possible outcome for all to prevail.