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    Tax Planning

    Oxford CPC, LLC professionals and partners offer Canadian and U.S. attorneys and notaries with deep Cross Border expertise to provide practical planning and recommendations and the implementation of the plan in accordance with the laws of the appropriate jurisdiction. Cross border tax estate planning and real estate involves many complex issues and typically requires at least two firms involved, one with Canadian expertise and the other with U.S. expertise.

    US Estate Tax Planning for Canadian Residents with US Property

    U.S. estate taxes can impose a serious burden on the family members of Canadians who own US property at the time of their death. The steps outlined in this article can help to reduce this burden. Note, however, that the planning ideas discussed here apply only in situations where both the decedent and the surviving spouse are Canadian citizens and residents and are not US citizens, greencard holders, or US residents. In other situations, these ideas may not be appropriate.

    Canadians are exposed to US federal estate tax on the fair market value of property that is "situated in the United States" (US situs property). US situs property includes real estate located in the US; certain tangible personal property located in the US (furniture in the vacation condo, for instance); debts of US persons (including US government debt, with certain exceptions); US pension plans; US annuity amounts; and certain interests in trusts and partnerships.

    Shares of US corporations are also considered US situs property, regardless of where the shares are physically located and traded; in fact, as long as the stock is of a company organized in or under US law, the shares will be included in the assets subject to US estate tax.

    The taxable estate for US estate tax purposes is the fair market value of all of a decedent’s US situs assets minus certain allowable deductions. Once the taxable estate has been determined, the US federal estate tax applies at graduated rates from 18% to 46% in 2006.

    Tax Implications for Canadians renting U.S. Property

    Many Canadians own U.S. recreational properties. Retired or semi-retired Canadians who are seasonal residents of the U.S., or “Snowbirds” frequently own or rent property in the U.S.

    If one of these situations apply, you can rent your U.S. property on a part-time or full-time basis when not in use. If so, you are deemed a “non-resident alien” by the IRS and are subject to U.S. income tax on the rental income.

    Tax on rental income for Canadians with U.S. Property

    There is a tax rate of 30 per cent of gross income and therefore ideal to pay tax on net income, after all deductible expenses. This would result in reduced taxes. The Internal Revenue Code permits deductible expenses, if you select to permanently treat rental income as income that is affiliated with the conduct of a U.S. trade or business. You can then claim expenses related to owning and operating a rental property during the rental period, such as mortgage interest, property tax, utilities, insurance and maintenance, depreciation. If you borrow the funds in Canada, secured by your Canadian assets, you would not technically be able to deduct that interest on your U.S. tax return. Obtain strategic tax planning advice on this issue. Once you decide to this method, it will be permitted for all subsequent years, provided you file an annual return, unless approval to revoke it is requested and received from the IRS.

    IRS Filing requirements for Canadians with U.S. Property

    You must report the gain or loss on sale by filing Form 1040 NR, U.S. Non-Resident Alien Income Tax Return. You will then have to pay U.S. federal tax on any capital gains, and if you own the real estate jointly with another person, each party must file the above form. Furthermore, you must report any capital gains on the sale of your U.S. property in your next annual personal tax return filing with Revenue Canada. Canadians must report worldwide income and gains and pay tax on 75% of any capital gains, converted to the equivalent in Canadian dollars, at the time of sale.

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