Today’s blog is written by Jessica J. Butler, Law Clerk at Fasken LLP.

As today’s world continues to grow increasingly interconnected, more estate professionals find themselves dealing with a web of cross-border assets and jurisdictional issues.  This post considers certain issues that you might face when administering a Canadian estate with assets situated in the United States.

Legal Authority

You must first determine whether you will need legal authority to deal with the US assets, as would be the case with real property owned by the deceased, for example.  As in Canada, US financial institutions may require a grant of probate from a US court before they will release any funds held in a bank or brokerage account.

For the purposes of obtaining legal authority over US assets with a Canadian grant of probate, an ancillary appointment must be sought in the same US jurisdiction in which the assets are situate.  This proceeding will be “ancillary” to the primary estate administration based in Canada and will authorize the transfer of US assets on the death of a non-US resident.  This is in contrast to a resealing of a foreign grant, which process can only be used in countries that have had or retain a link with the Commonwealth.

Initial jurisdictional issues such as bonding are subject to the particular state’s probate laws and should be considered with US counsel, as applicable.  Certain states might require local executors, or strongly prefer local executors.

Tax Implications

Non-US residents who are not US citizens are subject to estate tax rules and the US’ Internal Revenue Service (“IRS”) will ensure that applicable US-situated assets[1] left by a non-resident do not leave the US without first recovering payment of the applicable taxes.  If the fair market value of the US assets owned by the non-resident exceeds $60,000 USD, it is likely that estate taxes will be owed to the IRS and an estate tax return must be filed.

An estate tax return is completed by filing a form 706-NA, which must be filed within 9 months after the date of death, unless an extension has been expressly granted.  An Application for Extension of Time to File a Return will provide an automatic six-month extension, and additional extensions may be considered for executors outside of the US.  Penalties for both late filings of returns and late payments of tax may be applicable unless there is reasonable cause for delay.

The Canada-US Income Tax Treaty provides Canadian estates with some relief from US estate taxes with unified, martial, and foreign tax credits.  There is another exemption for small estate relief which provides an exemption from estate tax where a Canadian resident has a world-wide gross estate that does not exceed $1,200,000 as of the date of death.  The small estate relief exemption does not apply if real property was owned in the US by the deceased.

It is important to note that even if no estate tax is due, a Form 706-NA must be filed within nine months of death in order to claim any benefits under the Canada-US tax treaty.

Federal Transfer Certificate

Upon the filing of an estate tax return and payment of any associated taxes less exemptions, a Federal Transfer Certificate (“Transfer Certificate”) will be granted.  A Transfer Certificate certifies that no estate taxes are owing to the US federal government.  A financial institution may be hesitant to release funds without a Transfer Certificate, lest it find itself liable for any subsequent estate taxes found owing. Many financial institutions in the US will accordingly require a Transfer Certificate, even when no estate taxes are found owing, prior to releasing estate funds.

Final Words

There are many factors to consider when dealing with US assets in a Canadian estate administration, and this blog simply scratches the surface.  Despite the Canada-US Tax Treaty, many Canadian estates will have US estate tax liabilities and/or face challenges posed by US-situs assets and accounts.  It is important to consider the implications of holding US assets during the planning process, as there may be actions that can be taken prior to death to reduce or eliminate issues associated with the administration of US assets.  Otherwise, the ownership of such assets may complicate the estate administration process.  In all such areas, advice from competent professionals is strongly advised.

[1] US assets subject to estate tax includes, but is not limited to:

• Real estate;
• Tangible personal property;
• US securities;
• Interests in US qualified retirement plans or annuities; and,
• Business related assets.