Topics to Discuss

  1. Introduction: Know Your Client
  2. Common law vs. Civil Law Jurisdictions
  3. Recognition of Trusts
  4. Multiple Taxation in Life or on Death
  5. Canadian Outbound Taxation
  6. Foreign Property Reporting
  7. Offshore Investment Fund Property
  8. Foreign Trusts

Know Your Client

  • Review comprehensive statement of net worth
  • Identify location and ownership of all property
  • Consider current estate plan, if any
  • Review family tree, background, residence, domicile, citizenship for client and family members

Common Law Versus Civil Law

  • Matrimonial Regimes
    • Separation of property during marriage
    • On death or divorce: equitable division of property in common law jurisdictions
    • Community of property in civil law jurisdictions
  • Testamentary Freedom versus Forced Heirship
    • General common law freedom limited by spousal and dependent claims
    • Civil law forced heirship provides for mandatory distribution of a portion of the estate to family members

Recognition of Trusts

  • Generally, civil law jurisdictions do not have the trust concept , i.e. the division of ownership between "legal" and "beneficial" is not recognized in law
  • Hague Trust Convention provides for recognition in those jurisdictions it is in effect
    • The Hague Conference has currently 82 Members: 81 States and the European Union, including for example, France and Italy
  • Income tax implications unclear in some civil law jurisdictions: separate entity/contract/agency ?

Multiple Taxation in Life or on Death

  • Tax can be levied on a living person, a deceased, an estate and/or a beneficiary
  • Tax base can be: citizenship, residence, domicile, location of assets
  • Some tax treaties provide relief from double taxation in life or on death
  • Need for advance planning, including tax liability of intended beneficiaries

If Hold Interests in Certain U.S. Entities, There May Be Exposure to Double Taxation

  • The CRA considers a Limited Liability Company ("LLC") to be a separate corporation for Canadian tax purposes, even though for U.S. tax purposes, these are treated as "pass‐through" entities, like a partnership
  • Recently, the CRA announced they would treat Limited Liability Partnerships ("LLPs") and Limited Liability Limited Partnerships ("LLLPs") created in Delaware and Florida also as separate corporations

If Hold U.S. Real Estate, The Issues To Consider Include The Following:

  • U.S. Estate tax at an escalating rate up to 40% of the gross value of U.S. situs property, such as a U.S. vacation home
  • U.S. Gift tax on a similar scale
  • U.S. income tax on sale of the property
  • Canadian income tax on the capital gain either deemed to be realized on death or from actual sale of the property
  • Avoiding double taxation

Available Arrangements to Hold U.S. Vacation Property

  • Individual ownership
  • Holding company in Canada
  • Holding company in U.S.
  • Non‐recourse mortgage
  • Life Insurance
  • Canadian family trust

Use of Canadian Family Trust

  • Structure
    • Spouse with resources contributes purchase price of property to trust as settler
    • Other spouse is trustee
    • Beneficiaries include other spouse and issue (but not settlor spouse)
  • Implications
    • Insulation from U.S. Estate tax and Gift tax
    • Avoidance of U.S. probate on death
    • Integration of trust with wills and estate planning
    • On sale, capital gain taxed in the U.S. to trust or individual beneficiaries at long‐term capital gains rate, currently 20%
    • On sale, must recognize U.S. capital gain to trust or beneficiary in Canada , subject to maximum tax at 26.77%, with a foreign tax credit for the 20% tax paid to the U.S.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.