The U.S. gift tax is often overlooked by Canadians and their advisors. Most U.S. citizens living in Canada are aware of the U.S. estate tax and gift tax application. However, when it comes to Canadian residents who are not U.S. persons, only a minority are aware of the potential application of the U.S. gift tax. The author admits, the U.S. gift tax rarely applies to Canadian residents and this blog will look at some instances where a Canadian resident could, inadvertently, trigger the U.S. gift tax.

What is the Gift Tax?

It is worth noting that the U.S. gift tax is a transfer tax, not an income tax, and it is levied against the donor, not the recipient, of the gift. It is important to appreciate that the U.S. gift tax applies differently to a non-U.S. person and Canadian advisors can truly assist their clients by providing guidance to potentially avoid the application of U.S. gift tax.

For a Canadian resident (or any non-U.S. person), the U.S. gift tax applies only to a transfer of tangible assets located in the U.S. (or deemed located in the U.S.) at the time of the gift. The annual U.S. gift tax exclusion applies to non-U.S. persons therefore, it is only gifts with a value in excess of $18,000[1] USD that would be subject to the U.S. gift tax.

How Could the Gift Tax Apply to a Canadian resident?

The U.S. gift tax application may be best explained by way of an example. Let’s assume a Canadian snowbird has a U.S. bank account to cover their expenses when vacationing South of the border. The snowbird also has a child living in the U.S.  One year, the snowbird parent wants to make a gift of $100,000 to the child and makes the gift by way of a bank wire transfer from their U.S. bank account to the U.S. domiciled child as it is easier to transfer the funds from a U.S. bank account.

The IRS’ position is that cash and wire transfers of cash are deemed tangible personal property. Thus, in the above example, since the transfer of cash was from a U.S. bank account, the IRS would deem the gift of cash to be made within the U.S. and U.S. gift tax could be triggered and levied against the Canadian donor. If the gift was made from a Canadian bank account, no U.S. gift tax would apply since the gift would not be made within the U.S. A subtle yet important distinction. Other tangible assets that may be subject to U.S. gift tax include art, jewelry, and furniture.  It is also worth noting that real property located in the U.S. is considered U.S. situs for gift tax purposes and a donation of U.S. real property would be subject to gift tax as well.

Another word of caution is to make sure the Canadian resident does not transfer money or property from a Canadian corporation (this would be an anomaly in itself) as the source for the gift. This is because the U.S. tax rules allow the IRS to re-characterize the intended gift as income resulting in the recipient having to pay U.S. income tax on the amount received.

There are some exceptions to the application of gift tax if the donor pays tuition directly to an education institution or pays medical expenses on behalf of someone else. It is up to the donor to evidence that the payment is for the purpose of attending the education institution or for medical treatments or expenses.

Be a “Strategic Donor”

Canadians who wish to make gifts to loved ones living in the U.S. may need to be strategic in their approach; especially if the gift involves U.S. tangible assets. Essentially, one’s generosity in a cross-border context may require professional tax advice.

[1] This is the annual exemption for 2024 for gifts other than to a spouse.