We are very pleased to share that David Altro and Hadielia Yassiri were asked to prepare an article for the Society of Trust and Estate Practitioners Journal (STEP Journal), which was published in the November 2018 edition. Their article titled “Deep Freeze” explores the US tax implications of Canadian estate freezes. The various US tax issues for US persons living in Canada who implement an estate freeze, is the main focus of this article. The article examines specific provisions under the US Internal Revenue Code that adversely affect Canadian corporate reorganization and estate freeze planning; including US gift tax, US grantor trust rules, and US estate tax consequences.
To read the article you can see it in part below, or click here to read the STEP Journal (“Deep freeze,” STEP Journal, Vol 26, Issue 9, pp.43-45).
David Altro and Hadielia Yassiri
STEP Journal, Vol 26, Issue 9
Two new clients, Robert and Cindy, reside in Toronto with their children. Robert and the children are dual US-Canadian citizens; Cindy is a Canadian citizen only. The family net worth is CAD30 million. Robert owns 100 per cent of a holding company (Holdco), which owns 100 per cent of an operating company (Opco) worth CAD10 million. In 2015, the family was advised to proceed with a reorganisation and estate freeze. New preferred shares of CAD10 million were issued to Robert, with voting and redemption rights. A discretionary family trust was settled, which subscribed to the new common shares. Robert is the trustee, and the beneficiaries are Robert, Cindy and the children. The family decide to review their planning from both a Canadian and a US perspective.
The principal concern is whether the Canadian planning strategy of an estate freeze is recognised on the US side, given the dual citizenship of Robert and the children. Although there are a number of mechanisms built into the US Internal Revenue Code (the Code) and the Canada-United States Income Tax Convention (the Convention) to prevent double taxation, certain tax-advantaged Canadian structures may not receive favourable US tax treatment.
THE CANADIAN PERSPECTIVE
A corporate reorganisation is often used to freeze the capital gains tax (CGT) at current values where the value of a business, in this case Opco, is expected to increase. The freeze can multiply the Canadian lifetime CGT exemption (the CGE), which is currently CAD848,252 per person, across multiple beneficiaries to the extent a sale of qualifying shares of a frozen corporation takes place. From a Canadian perspective, an estate freeze can be an attractive strategy. But for families with US citizens, it can have some unexpected and adverse consequences.