Estate Planning with Foreign Real Estate: Tax Treaty Relief

As discussed in a previous article, the combination of the Canadian income tax consequences that arise on death in respect of foreign real property and the foreign taxes that may apply in respect of that same property may result in double-taxation. One way that such double-taxation may be mitigated or eliminated is by the application of a tax treaty.

For example, if an individual owns real estate such as a home in the U.S., the Canada-United States Tax Convention (the “Canada-U.S. Treaty”) sets out certain rules with respect to the taxation of that home on the death of the owner.

In addition to the Canadian income tax that arises from the deemed disposition of the U.S. home on the individual’s death, the Canada-U.S. Treaty provides that the U.S. may also impose tax on the gain resulting from the disposition of such property. This can result in double-tax.

However, the Canada-U.S. Treaty provides that certain U.S. tax credits are available to Canadian residents (credits that otherwise would not be available without the treaty) in respect of the tax imposed on the U.S. home. Specifically, the Canada-U.S. Treaty increases the available credit in respect of U.S. estate taxes imposed on a Canadian deceased taxpayer from $13,000 to as much as $192,800 and provides for a “marital credit” in certain circumstances where the property is transferred to a deceased taxpayer’s spouse.

In addition, the Canada-U.S. Treaty provides that Canada will provide Canadian residents a deduction from Canadian tax where a deceased taxpayer is required to pay tax to the U.S. in respect of U.S. property.

The taxation of foreign property, of course, depends on the country where the foreign property is located, and not all countries have a treaty with Canada. Where a treaty is in place, it should be carefully considered to determine whether it provides any relief from the double-taxation that may occur on death in respect of property located in that foreign jurisdiction.

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