David A. Altro was recently interviewed for an article which has appeared in the Report on Business section of The Globe & Mail newspaper. In the article, David explains some of the obstacles a Canadian may face when leaving Canadian or US real estate to their heirs if they are living in the US. Click here to view the article online or scroll down to read the piece where David is quoted.
Borders complicate gifts to heirs – Canadians leaving money or property to residents of other countries could find their value being eaten up by taxes
The Globe & Mail, Report on Business
Friday, December 6, 2013
When Bruce Cumming heard that a client’s son had relocated to Australia because of a job promotion, one of his first thoughts was: Time to revisit his client’s estate plan.
Mr. Cumming, senior investment adviser and executive director of the private client group at Cumming & Cumming Wealth Management Inc. in Toronto, was thinking about the implications when Canadian residents pass on assets to relatives living abroad. For example, could the beneficiaries be hit by significant taxes in their home country? Will they be able to manage a gift of real estate in Canada?
In a country of immigrants and globally mobile citizens, these implications are something Canadians need to consider when making plans to leave money or other assets to beneficiaries living abroad.
“In estate planning you need to ask ‘Who are the beneficiaries and where are they,’ particularly when you’re dealing with clients who are newer residents of Canada,” Mr. Cumming says. “If your beneficiaries are in different jurisdictions or, given the high mobility of our society, moving to different jurisdictions, you can’t go to sleep with your will – you have to make changes as the location of your beneficiaries’ residence changes.”
Many Canadians today – especially those who arrived here as immigrants – are already sharing their wealth with relatives abroad; according to the World Bank, in 2012 Canadians sent an estimated $23.4-billion in money remittances overseas. It should come as no surprise, Mr. Cumming says, that these Canadians would also want to leave an inheritance for family members living abroad.
Young Canadians are increasingly leaving the family nest and pursuing career opportunities in other countries, says Prashant Patel, vice-president for high-net-worth planning services at RBC Wealth Management.
“What we’re finding more common now is grown children going to the U.S. or to the U.K. and becoming residents there, and when their parents pass their assets, they are going to their children in these countries,” he says.
To ensure an inheritance doesn’t turn into an encumbrance, Canadians planning to leave assets to beneficiaries in another country should take into account Canadian and foreign tax and estate laws, says Cheyenne Reese, a taxation, trust and estate planning lawyer with Legacy Advisors Law Corp., in Vancouver.
“If, for example, a trust is created for someone overseas, the trust itself might be considered a Canadian taxpayer but the beneficiary might also be subject to tax in their own country,” Ms. Reese says. “Depending on where the beneficiary is located, there can be very complex and potentially punitive rules.
“A big challenge is that you’re having to deal not only with Canadian rules but also the rules of the beneficiary’s home country.”
Complex tax rules on monetary gifts aren’t the only challenge for Canadians with out-of-country bequests. If you’re thinking of leaving the family cottage to your daughter in New York, or perhaps a downtown condominium to a niece in India who could use the steady rental income, you may be passing on problems along with the property, Mr. Cumming says.
“If your beneficiaries are going to end up owning a cottage in Muskoka or some other property in Canada, then now they have to take title of the property and appoint a representative in Canada who can sign off on the real estate,” he says. “Then they have to manage the real estate, and on top of all that there are tax considerations because now they own foreign property and in various jurisdictions like the United States, you’re required to report all income worldwide.”
What often happens in these cases, Mr. Cumming says, is the beneficiaries end up selling the real estate rather than dealing with the headaches of owning Canadian property.
The Canada Revenue Agency requires non-residents to prepay a percentage of estimated capital gain when they sell their real estate property in Canada, and the sale must be reported within 10 days to avoid a financial penalty. Given these requirements, Ms. Reese says, it may be better for Canadian owners to sell their property and pass on the cash, rather than the real estate, to their beneficiaries overseas.
David Altro, a Toronto-based Florida tax lawyer and managing partner at Altro Levy LLP, which specializes in cross-border tax and estate planning, says Canadians with real estate property in the U.S. should consider transferring ownership to a cross-border trust if they want to pass it on to family members living south of the border.
This keeps the property from being subject to probate in the beneficiary’s home state, Mr. Altro says.
“Let’s say you’re a Canadian who owns Florida property and you want to leave it to your son. When you pass away that property will be subject to Florida probate, which is very expensive and time-consuming,” he says. “Whereas a cross-border trust doesn’t die, so there’s no probate, and the trust remains in place after you die.”
Canadians who intend to leave substantial cash assets to children or other family in the U.S. might want to consider setting up a “trust for life” to protect their beneficiaries’ estate from getting hit big time by the Internal Revenue Service, says Mr. Altro. Under U.S. law, beneficiaries of an inheritance from Canada don’t get taxed upon receipt of their windfall, but when they die their estate gets taxed at 40 per cent after the first $5.25-million.
With a trust for life, any assets inherited under the trust don’t become part of the beneficiary’s estate, Mr. Altro says.
Mr. Patel at RBC Wealth Management says an international trust might be a good solution for Canadians with beneficiaries in other countries. These trusts are typically set up in countries where there is little or no income tax.
Income from these trusts may continue to be taxable in Canada, Mr. Patel says, but depending on where they live, beneficiaries could avoid paying high taxes in their own country when they receive their inheritance.
WHERE THERE’S A WILL
Canadians who own real estate in, say, India, or have money sitting in a bank account in Austria, and want to bequeath these assets should have a will made where the assets reside. This makes it easier to persuade local authorities and banks to release these assets to beneficiaries, says Bruce Cumming, a Toronto investment adviser. “A bank manager in Austria might feel ill at ease releasing funds from an account on the orders of a Canadian will,” Mr. Cumming says.
But there’s a caveat: Most wills start with a statement revoking any prior will. So a will intended to take care of assets and relatives in another country could actually render void a Canadian will that covers all other assets and beneficiaries, says David Altro, a Toronto-based tax lawyer. “If you’ve got assets and beneficiaries in various countries, make sure you’re dealing with lawyers that are licensed in each of those countries,” he says. “And make sure they all understand your intentions.”