The Tax Act reduces U.S. personal income tax rates. The top
bracket is now 37%, in contrast to the prior 39.6%, and applies to
individuals with income of $500,001 or more. In comparison, the top
marginal tax rate in 2018 for an Ontario taxpayer is 53.53% and applies to
individuals with income of $220,000 or more. U.S and Canadian tax rates are
on opposite trajectories – ours increasing and the U.S.’s decreasing. The
question of the day: Is the Canadian policy approach sustainable given our
reliance on and interconnectivity with the U.S.?
The Tax Act doubles the tax exemption for gift, estate and
generation-skipping tax (“Transfer Taxes”) for U.S. Persons. In 2018, a
U.S. Person will now have an exemption of approximately US$11.2 million,
indexed for inflation. For a married U.S. couple, this will mean a total
exemption of approximately US$22.4 million, indexed for inflation. This
huge exemption amount for Transfer Taxes means that at least for the time
being, for U.S. Persons, estate tax will be paid by only the very few.
These changes to U.S. estate tax follow a general trend in many countries
in the last several decades to reduce or eliminate estate and inheritance
You are a U.S. Person for Transfer Tax purposes if you are a U.S. citizen,
including a dual citizen of the U.S. and another country, or if you are
domiciled in the U.S. It is possible to be a U.S. citizen without being
aware of your status. For example, you may be a U.S. citizen if you were
born in Canada to one or more U.S. citizen parents, even if you have never
resided in the U.S. There are also other types of “accidental” U.S.
citizens, including children born in U.S. hospitals. You may also be a U.S.
Person if you have moved to the U.S. to work and have a U.S. domicile
because you intend to permanently reside in the U.S.
But the estate tax has not been permanently repealed – there is a “sunset,”
and pending future legislative changes, the estate tax will revert on
January 1, 2026, to US$5 million, adjusted for inflation, which at 1.5% per
year would equate to about US$6.5 million in 2026.
For a U.S. Person, estate tax is based on the value of his or her worldwide
estate. For a non-U.S. Person, estate tax is based on the value of his or
her U.S. situs property. There is a US$60,000 estate tax exemption
for a deceased person who is not a U.S. person, which continues and remains
unchanged. As well, under the Canada-U.S. Tax Treaty, Canadians get further
possible relief since the Treaty allows a credit against U.S. estate tax,
based on the proportion of a deceased person’s U.S situs assets to
his or her worldwide assets multiplied by the exemption a U.S. person would
have. If a deceased Canadian has a worldwide estate with 10% U.S. situs assets, the credit will increase from $549,000 to
approximately US$1.12M (10% of US$11.2M). Good news indeed!
The Tax Act is now effective as of January 1, 2018. Canadians with
U.S. connections should review their individual estate planning and seek
professional advice to ensure it is still appropriate. In particular, if
they are a U.S. Person and if their estate planning includes a will that
contains formulas based on the amount of the U.S. exemption, it should be
reviewed to consider whether the plan of distribution still reflects their
Given that there has not been a permanent repeal of U.S. estate tax, what
the future holds is uncertain. Ensuring there is flexibility in the estate
plan so that it can be revised and updated as circumstances change will be
of key importance.
Margaret O’Sullivan is the principal of the Toronto-based trusts and estates law firm
O’Sullivan Estate Lawyers. She practices exclusively in the areas of estate planning, estate
litigation, advising executors, trustees and beneficiaries, and
administration of trusts and estates. This article originally appeared
O’Sullivan Estate Lawyers blog. Reprinted with permission.
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