New U.S. property tax rules hit home

David A. Altro is a frequent contributor to Paul Delean’s business column in the Montreal Gazette.

Scroll down to read David’s interview about his new book, Owing U.S. Property – The Canadian Way, 2nd Edition.

The Gazette
Monday, August 29, 2011

A strong loonie and depressed U.S. real estate prices have led to a buying binge south of the border by Canadians. We’re now the largest non-American buyers of U.S. real estate. Many purchasers, however, have only a vague idea of what they’ve committed to from a tax and legal standpoint.

“There’s a presumption among people that the laws must be the same in the U.S. and Canada. A lot find out otherwise only after they buy,” said David Altro, a Montreal lawyer who also practices in the United States.

Altro, who specializes in cross-border tax, property and estate-planning issues, is the author of a 2009 guidebook titled Owning U.S. Property the Canadian Way.

An updated version of the book is on the way because of significant changes looming in U.S. estate tax, starting in 2013.

Altro said those changes will be “expensive and onerous” to many Canadians if they don’t do their homework and/or get advice.

Starting Jan. 1, 2013, the exemption level on estate tax for owners of U.S. property drops to $1 million in worldwide assets from $5 million, and the maximum tax rate on U.S. property rises to 55 per cent from 35 per cent.

Although the threshold may still seem high, Canadians must include in the calculation the value of their RRSPs and life insurance payable at death, which pushes a lot more people into the tax zone.

Estate tax isn’t the only significant difference between the two countries.

Florida counties have probate rules that could cause a lengthy delay and expensive disbursement to settle the estate of a Canadian who dies owning property there.

If a property owner becomes mentally incapacitated, no transaction is possible until Florida’s guardianship requirements have been met. “A Quebec incapacity mandate often isn’t valid in Florida,” Altro noted.

Nor does Florida recognize handwritten holographic wills, as Quebec does.

Canadians who give U.S. property to relatives are liable for U.S. gift tax as well as Canadian capital-gains tax (determined using the fair market value). Adding your children to the title also could put you on the hook for a taxable gift, and leave the property vulnerable to seizure if the children have marital or financial problems.

Altro said one way for Canadians with significant property to minimize hassles, taxes and property transitions is to create a cross-border trust, with one or more people as trustees.

“The trust doesn’t die when the person does, so you can avoid estate tax,” he said.

Having a corporation own U.S. property isn’t usually a good idea, he said, since the U.S. capital-gains tax is higher for corporations; states such as Florida can tack on an additional levy of their own, and the Canada Revenue Agency may charge a “shareholder benefit tax” to those who make use of outside property owned by a corporation.

Altro says tax and estate planning is always best done beforehand to avoid complications and surprises. So before signing for that Florida condo, make sure you know where you stand.

© Copyright (c) The Montreal Gazette