My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a tax partner and the managing partner of Cunningham LLP in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog do not reflect the position of Cunningham LLP. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Tuesday, January 25, 2011

How To Hold A US Vacation Property

With the return of the US estate tax; albeit at a reduced 35% rate with a $5,000,000 exemption for 2011 and 2012, Canadians once again have to consider planning for potential US estate taxes. The portion of the $5,000,000 exemption available to non-resident Canadians is equal to $5,000,000 (in the past the exemption has been converted to something known as a unified credit)  multiplied by their US situs assets divided by their worldwide estate. Thus, most Canadians will not have US estate tax issues for 2011 and 2012 because of the revised estate exemption and lower tax rate. However, the US estate tax debate is far from over and the exemption could fall precipitously in 2013 and beyond, while the tax rate could potentially increase.

So how do you plan for 2013 and beyond when buying a US vacation property in 2011 and 2012? Firstly, assume a lower exemption going forward, say $1,000,000 and an estate tax rate as high of 55% (both these numbers have been rumoured). Then consider what your exemption may be based on the pro-ration of your projected US situs assets after your 2011/2012 vacation property purchase as a percentage of your worldwide assets. If that number seems to be creating US estate tax, you may wish to consider one of the purchase option structures below in conjunction with professional advice from someone who specializes in US taxation.

First a quick step back. For anyone who bought US vacation properties prior to June 2004 in what were known as single purpose corporations, those properties are still exempted from US estate tax. However, all good things must come to an end and effective June 2004, the CRA stated that going forward, Canadians would be assessed a taxable benefit if they purchased their US vacation properties in a single purpose corporation. However, the CRA did grandfather existing single purpose corporations until the earlier of the sale of the US real estate by the single purpose corporation or the disposition of the shares of the single purpose corporation.

Over the last few years, various structures and plans have been set forth and considered to replace the single purpose corporation, however, it now seems that most professionals have settled upon a new structure of choice, a Canadian resident discretionary trust.

The use of a Canadian resident discretionary trust is usually suggested for the purchase of more expensive US vacation properties, say over $300,000 and for individuals who wish to transfer the US property to their spouse and/or children upon their death. If the trust is properly structured; legal professionals say the trust must be irrevocable and cannot be considered a grantor trust in the United States, then any US estate tax will be deferred until the death of the beneficiaries (spouse and children).

It should be noted, the above structure may not work if rental income is earned and the use of a discretionary trust may be problematic if financing is required as US lenders are averse to lending to a Canadian resident trust.

In any event, if you plan to purchase a US vacation property and consider the use of a discretionary trust, you should utilize the services of tax lawyer familiar with the issues. I would suggest that in most cases the lawyer who handled your Canadian house purchase will not be qualified to handle this transaction.

Finally, where the vacation property cost is in the $200,000 to $300,000 range, you may want to consider joint ownership with various family members. Again, you should obtain some US advice, but being penny wise will definitely make you pound foolish in dealing with the complicated issue of US vacation property ownership.


Winter Driving Rant


Talking about vacation properties and warm climates has boiled my blood. Has anyone noticed that as soon as it snows, people immediately fall into one of two groups? The first group consists of people who want to see how fast they can drive on a slick snowy day, and the second group is full of people who drive like they have never seen snow before and endanger themselves and others by driving so slow that other drivers must try to pull past them.

However, my biggest winter driving peeve is the people who do not clear their rear windshield of snow. Firstly, how can they drive safely without being able to see what is behind them, and secondly, as the driver behind these people, it is impossible to see what is going on in front of them.

Winter driving is tough enough without either of these annoying groups. 

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

1 comment: