Law Times

www.lawtimesnews.com Law Times / February 4, 2008 Page 13 T rusts and estates lawyers on both sides of the border are dealing with a growing number of tax considerations, with estate values on the rise and a large number of Canadian citizens and residents who have ties to the United States. The U.S. taxes people on the basis of citizenship, so even those who moved out at the age of one and never had any other ties with the country will still be liable for estate tax when they die, depending on its value, says Jordan Atin, a lawyer with Hull & Hull LLP in Toronto. "That can have a dramatic effect," says Atin. Although there are several credits that can be taken into account, the U.S. tax is around 45 per cent of the estate, he adds. According to the IRS, "Most relatively simple estates (cash, publicly traded securities, small amounts of other easily valued assets, and no special deductions or elections or jointly held property) with a total value under $1 million do not require the filing of an estate tax return." This amount was raised to $2 million for 2006 through 2008. The IRS notes that, "In its current form, the estate tax only affects the wealthiest two per cent of all Americans." Thus, for those with estates valued under $2 million, there isn't much of a concern, but over that, there are serious tax implications, says Atin. "Since Canada doesn't have a corresponding estate tax here, there's no credit for the money that you pay for U.S. estate tax." This issue is becoming more prevalent because values of estates are increasing. Also, the laws on estate tax are constantly changing in the U.S. "In fact, because of the way it's situated right now, there's a decreasing amount of tax on estate tax until 2010, and right now if you died in 2010 you'd pay no estate tax — and then 2011 it starts up again," he says. While the tax issue is a concern for American citizens abroad, it can also have an impact for Canadians who own any U.S. property, says Atin. This includes non-citizens who own vacation homes and even U.S. stocks in their portfolio. "We're seeing more people who have — because of the nature of our economy worldwide, I guess — you see more people owning property abroad, and that becomes a huge issue from a tax and estate point of view," says Atin. He adds that he's advising clients to get U.S. advice in this situation, especially before buying property south of the border, as the way one holds such property is crucial to determining tax position. "If you set it up in the typical way you would in Canada — for example, joint ownership — then you've basically lost a huge tax advantage," he says. As a result, what law firms often see is people who originally bought property jointly asking what they can do after the fact. However, there are gift taxes and other ways of restricting transfer of ownership in place, says Atin. Indeed, Kevin Gluc, a U.S. estates and trusts lawyer with Hodgson Russ LLP in Buffalo, says that the primary issues his firm sees involve either U.S. citizens residing in Canada, who are still subject to the U.S. estate and gift tax system, or Canadians who reside in Canada but own U.S. property, such as a vacation home in Florida, California, Arizona, or Hawaii.. "When Canadians purchase U.S. real property, that U.S. site is property for U.S. tax purposes," he says. Gluc notes that the issue in general is becoming more prevalent. "We've been getting lots of calls, specifically with respect to residential trusts for real estate," he says. Gluc's office also does planning for Canadian citizen residents who have children in the U.S., to help them with planning. Without proper planning the parents could create problems for the children in the future with estate tax, as they are U.S. beneficiaries. Another issue of potential liability for executors is non- resident beneficiaries, which is an issue now but historically was not, says Atin. Now, when someone makes a distribution of an estate to a non-Canadian resident, the non- resident has to go through a s.116 certificate process (that is, a request by a non-resident of Canada for a s.116 certificate of compliance related to the disposition of taxable Canadian property), which gets clearance from Revenue Canada before making a distribution to a non-resident, he says. "They say that the beneficiary has an interest in an estate in Canada that is Canadian property, and when they get money for that interest is when you distribute money out to them, based on their interest in the estate. That's like them selling Canadian property; it's like a non-resident vendor selling their property for exactly the same value that they have in cash," he says. However, if executors don't get this kind of clearance, this can give rise to some liability for them, notes Atin. Lawyers are not aware of many of these big issues, says Atin. And, clients are also not aware, often coming to lawyers after the fact, when they can't help them. There are huge tax consequences, as well as liability consequences for not adhering to the rules, he says. What can be done, says Atin, is, first, to spot the issue. When you're drafting a will, find out whether the client is a U.S. citizen, whether any beneficiaries are U.S. beneficiaries, and whether the client has any U.S. assets, including shares in companies. Once those issues have been identified, says Atin, then lawyers can bring in U.S. attorneys who can provide some advice as to how to structure the will. Gluc says that his firm usually works with Canadian advisors. He notes that if there is a U.S. connection, they should contact a U.S. advisor — and the best time is at the beginning. Trusts and estates lawyers seeing cross-border issues Rising estate values create tax concerns FOCUS caseAlert –Wills, Estates & Trusts An easy to use electronic service that keeps you up-to-date with the latest decisions in wills, estates and trusts. Each month subscribers receive an e-mail bulletin summarizing recent court decisions in the wills, estates and trusts area which are linked to the case digest and the full text decision in pdf format. 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Prices subject to change without notice, and to applicable taxes. For a 30-day, no-risk evaluation call: 1 800 263 2037 or 1 800 263 3269 www.canadalawbook.ca LT0204 Wills Estates Coll 1/30/08 9:48 AM Page 1 More people are owning prop- erty abroad and that becomes a 'huge issue' from a tax and estate point of view, says Jordan Atin. BY HELEN BURNETT Law Times LT *Pages 1-20.indd 13 1/31/08 6:56:22 PM

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