Do Canadians Need to File US Estate Tax Returns?
Key Points
- Canadians may need to file a U.S. estate tax return if their worldwide estate exceeds the U.S. filing threshold.
- The U.S. estate tax applies to non-resident aliens holding U.S.-situs assets, such as real estate or stocks.
- There are specific exemptions and credits available under the U.S.-Canada tax treaty to mitigate double taxation.
- Proper estate planning is essential to minimize potential U.S. estate tax exposure for Canadians.
- Consulting with a cross-border tax expert is crucial to navigate the complexities of U.S. estate tax rules.
If you need help in reviewing your cross-border tax or investment situation, please feel free to reach out to us here. We look forward to speaking to you soon.
Question
Hello Phil,
I have watched many of your videos on YouTube, and they have been very useful.
I have a question. Maybe you can do a video about it.
I am a Canadian citizen and resident. I am not a US person. Suppose I own US-listed stocks (such as Apple) and ETFs (such as ITOT) at a Canadian brokerage (such as BMOIL, for example). Suppose that the total cost of these investments is about $400k USD (or about $410k CAD). I’m up to date with the CRA. I file a T1135 every year and all is good. I do not have to file a 1040NR. My question is about what will happen after I die. I have read that my executor will have to file a US estate tax return with the IRS because my US-listed investments exceed $60k USD.
Question 1. What US tax forms will have to be submitted?
Question 2. Suppose that my executor does not know about this IRS requirement and does not file a US estate tax return. They simply sell my US-listed investments and distribute the money to my heirs. How will the IRS find out? What will be the consequences? Although I always do my Canadian tax returns by myself, perhaps my executor will hire an accountant to do my final Canadian tax returns. Perhaps the accountant will know about the IRS requirement, perhaps not.
I am quite certain that I will not owe any tax to the IRS because my total net worth is not large enough. I am not trying to cheat. I just wonder what will happen and what is the best course of action.
Thank you,
XXXXXXX
Answer
Hi XXXXX,
Thanks for being a subscriber to the YouTube channel.
You’ll want to get some actual cross-border tax advice on this; however, let me give you some general thoughts on your questions below:
- Yes, if your estate holds more than $60,000 of US situs assets, you’ll be required to file a US non-resident estate tax return (706-NA). Honestly, this is such an obscure requirement that unless you have an experienced CPA helping, this will likely get missed by most executors and Canadian tax professionals. In most cases, this will not be a taxable filing. If you’re under the current US estate tax exemption ($13.6M for 2024), your estate will not be required to pay US estate tax. That being said, the 706-NA will need to be properly prepared, and required treaty elections will need to be included in the filings in order to obtain Canada-US treaty benefits for the estate.
- Just because CRA and/or the IRS “may not find out” is never a reason not to properly file returns. In most cases, we file taxes on a voluntary basis and need to adhere to all relevant tax rules and filings. Penalties for late or missed tax filings can be significant, especially if the filings were intentionally not filed.
I likely wouldn’t try to plan out not filing the 706-NA unless your US holdings were quite small. In the current environment, many investors have a fair amount of US equities for diversification purposes. The filings, if done properly by good cross-border tax firms, are not terribly complicated.
If you need help in managing your investments, feel free to take advantage of our complementary cross-border investment consultation here:
https://chat.newsglobal.ca/o/c0b2f5c6
Hope that helps.
Cheers,
Phil