No one wants to unnecessarily expose themselves to US estate, gift, income, or generation-skipping transfer taxes or have to disclose all of their worldwide assets to the US Internal Revenue Service to reduce or avoid one or more of these taxes. Unfortunately, this occurs all too often when Canadian snowbirds purchase property in individual or joint names without first considering the most advantageous way for them to own their property.
For the purposes of this article, Canadian snowbirds can be defined as Canadians who aren’t considered US residents but own real property in the United States. Under the US tax system, these individuals are classified as “nonresident aliens.” As such, they are subject to US income taxes, gift taxes, estate taxes, and generation-skipping transfer taxes only on assets situated in the United States.
How Canadian snowbirds initially take title to real property in the United States matters. There are different ways of owning property in the United States––including individually, jointly, as tenants in common, or through an entity like a corporation, a trust, or an LLC––and each way of owning property comes with a different set of tax consequences on both sides of the border. Transferring ownership from one method of holding property to another (e.g., from joint ownership to trust ownership, etc.) also causes exposure to US transfer taxes.
Many Canadians purchase property in the United States under individual or joint names thinking that, if they learn of a better way to hold title to their property, they will transfer the property later. This is a big mistake. Once purchased, the transfer of the property will be subject to US transfer tax consequences that could very well cause taxes to be assessed on the transfer into a trust or other entity, which could have been avoided if the property was purchased through the trust or other entity initially.
I have seen this firsthand with many client couples who have owned property––primarily vacation homes––in the United States for a long time. When they initially purchased the property, they did so taking title as joint tenants with rights of survivorship (JTWROS). Taking title as JTWROS is a perfectly legitimate way of taking title, and it even avoids probate on the first spouse’s death, as the property automatically passes to the survivor.
However, although JTWROS titling avoids probate on the first death, it does not effectively avoid US estate taxes. Under JTWROS, on the death of the first spouse, the entire property is considered an asset of the first spouse’s estate (barring the ability to show the first spouse only contributed a fractional share of the purchase price, in which case, the fractional share would be considered part of the estate). And, if the property is retained by the surviving spouse, it will be included in their estate as well.
The best way for a Canadian snowbird to own property in the United States is to find the ownership method that avoids both probate and exposure to the US transfer tax system. Taking the time upfront to determine this is the most cost-effective approach. While restructuring ownership after purchase is possible, it may involve US transfer taxes.
Please contact me if you would like to discuss how you can avoid probate or exposure to the US transfer tax system on the initial purchase of US property or as part of your cross-border estate planning.