D'Amico Family Wealth Management Group Of RBC Dominion Securities

Transcription

1 D'Amico Family Wealth Management Group Of RBC Dominion Securities Presents David Altro from Altro Levy, Lawyers "Cross Border Tax & Estate Planning for Canadians with U.S. Real Estate" Angelo D Amico FCSI, CIM, CPA, CMA, CGA, CSWP Vice President - Portfolio Manager Tel: (514) Em a il: angelo.damico@rbc.com Christiana Kavadas B. Comm. Associate Tel: (514) Em a il: Christiana.kavadas@rbc.com Dario Falso Associate Tel: (514) Em a il: dario.falso@rbc.com Celina Toia, LL.B Bachelors of Law Ma r keting Consultant Web : November 4, 2015

2 CROSS BORDER TAX & ESTATE PLANNING FOR CANADIANS WITH U.S. REAL ESTATE November 4, 2015 Presented by David A. Altro, B.A., LL.L., J.D., D.D.N., F. Pl., TEP Florida Attorney, Canadian Legal Advisor & Quebec Notary

3 3 AGENDA Introductions Practice Areas Key Distinctions Case Studies Canadians Investing in Active U.S. Businesses Americans Living in Canada Purchase of U.S. Vacation Property Q & A

4 4 OUR EXPERTISE Cross Border Tax and Estate Planning US Real Estate Canadian Estate Planning (Trusts, Wills and POAs) Americans Living in Canada Corporate Tax Planning (Reorgs & Estate Freezes) Moving to the U.S. (Pre-Immigration Tax Planning)

5 5 CROSS BORDER PLANNING WHAT DO YOU WANT TO LEARN FROM THIS SEMINAR?

6 KEY DISTINCTIONS BETWEEN THE TAX SYSTEMS 6 Canadian tax system Taxes based on residency US tax system Taxes based on citizenship US citizens or green card holders living in Canada Tax filing obligations on both sides of the border

7 7 U.S. INCOME TAXATION US Citizens Subject to global federal taxation May be subject to global state taxation Residents Subject to global federal taxation May be subject to global state taxation Non-Residents Subject to US Taxation only on US Source income

8 8 WHAT DETERMINES RESIDENCY? Two Objective Tests: GREEN-CARD TEST A lawful permanent resident of the US with permanent immigration status under immigration law SUBSTANTIAL PRESENCE TEST A foreign national who is physically present in the US for at least 31 days during current year and present in the US for 183 days or more over a three year period computer under a formula

9 SUBSTANTIAL PRESENCE TEST: TAX QUESTION Days in the Calendar Year 0 days 120 days 182 days 365 days No action required Form 8840 Form 1040NR, Treaty based positions Canadian Health Insurance Concerns!

10 10 IMMIGRATION QUESTION 0 Days 180 Days* B2 Visa I Days *U.S. Immigration Reform Bill

11 TIE BREAKER PROVISIONS UNDER TREATY 11 Canada-US Treaty Relief if Considered a Resident of Both US and Canada 1. Location of permanent home 2. Closer personal and economic relations (center of vital interest) 3. Location of habitual abode 4. Citizenship 5. Competent authority

12 12 CASE STUDIES Case A: Canadians Investing in Active U.S. Businesses Case B: Americans Living in Canada B1: Corporate Issues Case C: B2: Compliance & Planning Purchase of U.S. Vacation Property

13 CANADIANS INVESTING IN 13 ACTIVE U.S. BUSINESSES Facts: Case A Ultra-High Net-Worth (> $100M) Canadian Citizen and Resident Partnered with a US associate to invest in real estate project in US 25M invested through tiered LLCs, with individual as ultimate member on top Properties have both conventional mortgage financing and personal loans & guarantees from client

14 CANADIANS INVESTING IN 14 ACTIVE U.S. BUSINESSES Issues: Case A US Estate Tax Substantial exposure on LLC membership interest and personal loans to US entities Difficult to qualify exposure due to fluctuating valuation of membership interests Canadian Tax Treatment CRA does not recognize flow-through treatment of LLC income Mismatching foreign tax credits where LLC is taxed as a partnership in the US

15 CANADIANS INVESTING IN 15 ACTIVE U.S. BUSINESSES Solutions: Case A Option 1: Tiered Corporate Structure Check the box on sole member LLC (top tier) Assign membership interest in multi-member LLC to new US C-Corp Roll all US interest into CanCo as corporate parent No need for changes at ground level entities Note sections 357 & 351 analysis in the US

16 CANADIANS INVESTING IN ACTIVE U.S. BUSINESSES 16 Case A: Option 1 Diagram CanCo. CANADA U.S. US Co. (new) US LLC (check the box) LLC LLC Real Estate Real Estate

17 CANADIANS INVESTING IN 17 ACTIVE U.S. BUSINESSES Solutions: Case A Option 2: Cross Border Limited Partnership (CBLP) Convey each parcel to new US limited partnership, owned by new Canadian LP Same tax treatment in both countries Better overall income tax rate capped at combined CDN rate Note: barriers with title insurance, transfer tax and property tax assessments and lender approvals See diagram on next slide

18 CANADIANS INVESTING IN ACTIVE U.S. BUSINESSES 18 Canadian Corporation as General Partner Case A: Option 2 Diagram GP -.5% LP 99.5% Individual as Limited Partner in LP #2 & Director/ Shareholder of CanCo Limited Partnership #2, Canadian LP CANADA US LLC as General Partner GP -.5% Limited Partnership #1, US LP LP % U.S.

19 19 TAX AND ESTATE PLANNING ISSUES FOR AMERICANS LIVING IN CANADA Holding Companies Controlled Foreign Corporations (CFCs) > 50% owned by US citizens; rules apply to US citizens who own > 10% of the shares Passive income taxable to US shareholders regardless of dividends Passive Foreign Investment Companies (PFICs) < 50% owned by US citizens Income test: > 75% of income is passive, or Asset test: > 50% of assets are held to produce passive income Throwback tax on excess distributions & capital gains

20 CORPORATE ISSUES FOR US CITIZENS IN CANADA 20 Reorganizations & Estate Freezes Standard Canadian plan can have disastrous results for US citizens in Canada IRC s deems value of preferred shares to be $0, such that entire value of frozen company is transferred to trust/kids Gift tax implications for deemed gift equal to preferred share value If corporate value is less than Applicable Exclusion Amount, trust could purchase life insurance to purchase preferred shares to pay estate tax bill on death of Freezor

21 CORPORATE ISSUES FOR US CITIZENS IN CANADA 21 Pre-freeze, HoldCo is a CFC, and rents taxable to US Shareholder regardless of distribution Subpart F Freezor is deemed to have transferred the entire $5M value to family trust as a taxable gift (IRC s.2701) US citizen beneficiaries of trust cannot access Capital Dividend Account tax-free on US side

22 22 CASE STUDY B1 - FACTS Dad (61) is a Canadian citizen and resident Mom (62) is a US citizen and Canadian resident Two children: Bob (29) is a US citizen and Canadian resident Susan (27) is a US citizen and Canadian resident

23 CASE STUDY B1 FACTS: CURRENT STRUCTURE 23 Dad is sole shareholder of HoldCo worth $12 million Dad s other assets are worth $5 million Mom is worth $2 million Dad and Mom to give each other the assets on first to die, or equally to the children on second death HoldCo OpCo Dad

24 24 CASE STUDY B1 - ISSUES If Dad dies first, HoldCo becomes a CFC if shares are left to Mom Passive income taxable to Mom regardless of distributions Mom s estate will be subject to US estate tax as second to die 40% tax on estate value over exemption amount Approx $5.5 million in tax

25 25 CASE STUDY B1 - SOLUTIONS Reorganize HoldCo as an Unlimited Liability Company (ULC ) Avoids CFC status because IRS will disregard ULC after Dad s death Tax-free conversion during Dad s life ULC buys life insurance on Dad s life ULC pays premiums from OpCo dividends Create Cross Border Spousal Trust in Dad s will for Mom Mom is income beneficiary, with ascertainable capital distributions Children are capital beneficiaries on Mom s death Mom can live off the income from corporate structure Reserve CDA distributions for children No US estate tax on Mom s death

26 AMERICANS LIVING 26 IN CANADA Facts: Wife is a dual citizen domiciled in Toronto She is worth 3M Husband is Canadian Citizen and Resident He is worth 15M Case B2 Their son is a dual citizen domiciled in New York Their daughter is a dual citizen domiciled in Toronto but might move to US in the future

27 AMERICANS LIVING 27 IN CANADA Issues: Annual Reporting Requirements US estate tax issues for American wife Inheritance for Dual citizen / US resident son Inheritance for Dual citizen / Canadian resident daughter Tax reporting for American citizen beneficiaries of Canadian trusts Note: Throwback Tax Case B2

28 AMERICANS LIVING 28 IN CANADA Solution: Case B2 Estate Planning Husband s Will with cross border spousal trust for wife Wife s Will to include QDOT Inter vivos dynasty trust for son Testamentary dynasty trust for daughter, as option Irrevocable Life Insurance Trusts (ILITs) Gifting strategies

29 PURCHASE OF U.S. VACATION PROPERTY 29 Case C Scenario 1 Facts: Husband and wife have worldwide assets of 20M (H=18M, W=2M) Both CDN Citizens and Residents US property purchase of 2M They have 2 CDN Citizen and Resident children Scenario 2 Facts: Husband and wife have worldwide assets of 20M (H=10, W=10M) Both CDN Citizens and Residents US property purchase of 2M They have 2 CDN Citizen and Resident children

30 30 US ESTATE & GIFT TAX US citizen or domiciliary: Subject to transfer tax on gifts during lifetime or estate tax on death on all assets regardless of where they are located Non-Resident Alien: Subject to estate tax on assets situated in the US Subject to gift tax on tangible assets located in the US Tax Rate: 18 40%

31 31 US ESTATE TAX - CREDITS Applicable credit exclusion amount for a US citizen or domiciliary = $5,430,000 (indexed) Applicable exclusion for a non-us person = $60,000 Enhanced applicable credit exclusion for a resident of Canada = $5,430,000 X (US situs assets / Global assets) Martial credit for Canadian citizen or resident = lesser of applicable credit available to the decedent and estate tax on assets transferred to Canadian citizen or resident spouse Not available if QDOT elected

32 ESTATE TAX: NON-RESIDENTS OF THE US 32 Property Situated Within the US Includes: US real property Tangible property in the US Shares of US corporations Debts of US persons Interest in partnerships carrying on US business US retirement plans US deferred compensation including options Excludes: Shares of non-us Corporation US bank deposits Portfolio debt obligations Life insurance proceeds

33 33 CROSS BORDER PLANNING U.S. ESTATE TAX EXAMPLE #1 INTERACTIVE CALCULATOR

34 34 CROSS BORDER PLANNING U.S. ESTATE TAX EXAMPLE #2

35 PURCHASE OF U.S. VACATION PROPERTY Case C Issues: The same in both scenarios: Probate 3% (approx.) on FMV (Florida) US Estate Tax Substantial exposure on the US assets (up to 40%) Long term planning for children Creditors Ownership Options: Limited Liability Company (LLC) U.S. C-corporation Canadian Corporation Two-Tiered Corporate Structure Trusts Limited Partnerships 35

36 PURCHASE OF U.S. VACATION PROPERTY 36 Case C Scenario 1 Solutions: Title in Cross Border Trust (CBT) for wife Beneficiary is cross border spousal trust for husband (QDOT?) Ontario Domestic Wills cross border spousal trust in husband s Will for wife Benefit: No Florida probate Avoid incapacity issues Note: this does not avoid US estate tax Scenario 2 Solutions: Title in Cross Border Irrevocable Trust (CBIT) where one spouse is Trustee That spouse is also beneficiary with kids Other spouse funds CBIT Or Life Insurance & CBT Or Non Recourse Mortgage & CBT Ontario testamentary cross border spousal trusts Benefit: No US Estate Tax No Florida probate Creditor Protections Note: 21-year rule

37 CANADIAN OWNERSHIP OF US REAL ESTATE 37 Avoids probate & incapacity issues Protects inheritance from divorcing spouses/creditors Preserves foreign tax credits (on sale/death) Reduces and defers U.S. estate tax (QDOT & discounting)

38 RELATED PARTY NON-RECOURSE DEBT 38 Property subject to US Estate Tax US Estate Tax example #2 Can reduce value by amount of non-recourse debt Conventional mortgage does not provide deduction Mortgage interest on business property is deductible for tax purposes with no US withholding Interest equal to at least commercial rate May create income for Canadian tax purposes Does not protect against appreciation Could also use US bank NRM Probate exposure

39 CROSS BORDER IRREVOCABLE TRUST SM ( CBIT ) 39 Avoids probate & incapacity issues Avoids U.S. estate tax 21 year deemed disposition rule Preserves foreign tax credits (on sale/death)

40 40 OUR PROCESS ANALYZE RECOMMEND IMPLEMENT

41 41 THANK YOU

42 42 THANK YOU Q & A Contact: David A. Altro, B.A., LL.L., J.D., D.D.N., F. Pl., TEP Florida Attorney, Canadian Legal Advisor & Quebec Notary daltro@altrolevy.com