Holding and Disposing of US Vacation Property, Hodgson Russ LLP, Friedlan Law Toronto Where Are We Going Introduction Overview of US Tax Issues for Nonresident Aliens ( NRAs ) The Case Studies Conclusion 2
Overview of US Tax Issues For NRAs 3 US Income Tax On Sales of US Real Property Tax rates Capital gain on US real property owned by individual/trust > 1 year = 20% max. federal Otherwise top rate for non-corporate taxpayer is 39.6% For corporations, 34% federal tax rate at taxable income > US $75,000 Withholding tax on sale/transfer by NRA ( FIRPTA ) 4
US Gift & Estate Tax System US taxes value of property transferred gratuitously US gift, estate and GST tax exemption for US Citizens and residents is US $5.43M for 2015 Maximum rate of gift, estate and GST tax is 40% 5 US Gift Tax for NRAs Applies to gratuitous transfers of US situs assets US real property US tangible personal property US $14,000 annual exclusion US $147,000 annual exclusion for NRA spouse Assessed on fair market value of transferred asset; maximum rate of 40% 6
US Estate Tax for NRAs Applies to NRAs on transfers at death of US-situs assets US Real Property US Tangible Personal Property US Stocks Debts of US Companies or Persons Partnership or LLC interests? Assessed on fair market value of asset; maximum rate of 40% 7 Case Study 1 8
Case Study 1 Facts (1) Acquired Florida property 9/2005 Joint tenants Cost US$500,000 (CDN$592,850) Payment by Mr. Roberts Mr. Roberts dies in 2012 Worldwide assets US$5,000,000 S. 70(6) rollover to Mrs. Roberts 9 Case Study 1 Facts (2) Mrs. Roberts deceased 09/15 FMV of FRP US$800,000 (CDN$1,054,320) Worldwide assets US$8,000,000 No other US assets 10
Case Study 1 CDNTax Issues Deemed disposition at FMV on death CG on CDN$461,470 CDN Tax before FTC CDN $114,260 Federal CDN$66,913, ONT CDN$47,347 No provincial FTC CDN Tax after FTC CDN$47,347 11 Case Study 1 US Tax Issues (1) Presumption with NRAs owning US real property as JTRWOS is the first spouse to die is taxable on full value unless it can be proven the other spouse supplied some or all of the consideration Since property passes by operation of law to surviving spouse, property is taxed in survivor s estate too 12
Case Study 1 US Tax Issues (2) Use of pro-rated exemption under Treaty US $5.43m x (value US prop. value world prop.) If world prop < US $5.43m, no US estate tax (Mr. Roberts) In Mrs. Roberts case, 10% - US exemption available (US $543,000) against US $800,000 value. 13 Case Study 1 Tax Liability to Estate CDN $ U.S. Estate Tax $73,802.40 CDN Capital Gain $461,470.00 CDN Federal Tax on CG $66,913.00 Credit for US Estate Tax ($73,802.40) Net Federal Tax on CG $0.00 Ontario Tax on CG $47,347.00 Total Tax $121,149.40 Effective Tax Rate 26.25 % 14
Case Study 1 Comments Total tax to estate CDN$121,149.40 Effective rate 26.25% Effect of prorated estate tax exemption Future planning use of trust 15 Case Study 1 US Comments If US real property is already owned in this way, consider severing the tenancy (so they hold as tenants in common) based on contributions by each spouse, and plan to reduce estate tax by using appropriate testamentary trusts Be careful of US gift tax issues severing joint tenancy and holding the property in proportions not based on contributions = GIFT TAX 16
Case Study 2 17 Case Study 2 Facts (1) The Smith family acquired a FRP in 1999 through a SPC Cost of FRP US$400,000 (CDN$585,917) Funded by loan Mr. Smith died in 2008 Debt & shares to Mrs. Smith by Will 70(6) applied 18
Case Study 2 Facts (2) Mrs. Smith dies in 2015 FMV FRP CDN$841,097 Will loan & shares to 2 sons, Joe & Bob Joe & Bob CDN residents, not US Persons Do not keep FRP 19 Case Study 2 US Tax Issues FIRPTA: US income tax at 38% effective rate on gain on transfer of US real property out of corporation (~US $90K) Withholding tax Must file IRS Form 1120F and Florida return to report transfer Estate Tax Exposure for Mr. and Mrs. Smith Exposure for Joe & Bob 20
Case Study 2 Capital Gains on Shares of SPC on Death FMV of Shares $139.836.00 Less ACB $100.00 Capital Gain $139,736.00 Tax Payable @ 24.76% $34,598.63 100% discount for US tax 21 Case Study 2 Corporate Tax Consequences of Sale (1) US$ CDN$ Sale Proceeds $650,000.00 $841,097.00 Cost/ACB ($400,000.00) $585,917.00 Gain $250,000.00 $255,180.00 TCG $127,590.00 22
Case Study 2 Corporate Tax Consequences of Sale (2) US$ CDN$ US Federal Tax $75,387.50 $97,551.13 Florida Tax $13,750.00 $17,792.44 Total US Tax $89,137.50 $115,343.57 23 Case Study 2 Corporate Tax Consequences of Sale (3) Federal Tax $0 Ontario Tax $0 Refundable Portion of Part 1 tax $0 RDTOH End of Year $0 CDA Credit $127,590.00 24
Case Study 2 Redemption Strategies (1) 50% Solution 100% Solution Deceased FMV of Shares $139,836.00 $139,836.00 Less ACB $100.00 $100.00 Gain Before Loss $139,736.00 $139.736.00 Loss Carryback $139,736.00 $82,014.00 Net Gain (Loss) $0.00 $57,722.00 Tax on Gain @ 24.76% $0.00 $14,291.97 25 Case Study 2 Redemption Strategies (2) Estate 50% Solution 100% Solution Proceeds/ACB $139.836.00 $139.836.00 Capital Dividend $69,868.00 $127,590.00 Taxable Dividend $69,868.00 $12,146.00 Tax on Taxable Dividend @ 40.13% (non-eligible) $28,038.03 $4,874.19 Loss on Redemption $139,736.00 $139,736.00 Stop Loss Limitation $0.00 $57,722.00 Available Loss $139,736.00 $82,014.00 26
Case Study 2 Pipeline Strategy Deceased Deemed Proceeds $139,836.00 ACB $100.00 Capital Gain $139,736.00 Tax on Gain @ 24.76% $34,598.63 Estate & Corporate Tax Tax on Newco on Redemption of SPC Shares $0.00 Tax to Estate o PUC Return $0.00 27 Case Study 2 Redemption & Pipeline Strategies Compared 50% Solution 100% Solution Pipeline Sale Proceeds $841,097.00 $841,097.00 $841,097.00 Total US Corp Tax $115,343.57 $115,343.57 $115,343.57 Total CDN Corp Tax $0.00 $0.00 $0.00 Tax CG at Death $0.00 $14,291.97 $34,598.63 Tax Taxable Dividends to Estate $28,038.03 $4,874.19 $0.00 Net Cash $697,715.40 $706,587.27 $691,154.86 28
Case Study 2 Comments Retaining FRP 15(1) benefit CRA position Distribution of FRP by SPC to Estate in kind US tax (38% of gain in FRP = US $89,137.50) Withholding tax/filing of corporate tax returns in US Sell property to trust if family will continue to own? 29 Case Study 3 30
Case Study 3 Facts (1) Mr. Rothbee FRB @CDN$400,000.00 Trust for spouse and issue All CDN residents, no US Persons 31 Case Study 3 US Tax Issues (1) Grantor spouse (Mr. Rothbee) cannot be a trustee or beneficiary Beneficiary spouse (Mrs. Rothbee) can be trustee and beneficiary BUT must be subject to ascertainable standard: health, education, maintenance and support ( HEMS ) 32
Case Study 3 US Tax Issues (2) 20% US federal capital gains rate on sale of property (as long as owned > 1 year) Potential disadvantages: Death of beneficiary spouse (grantor must rent) Divorce 33 Case Study 3 CDN Tax Issues (1) Attribution issues 75(2) Ordinary Trustees Ongoing maintenance Use of FRP 34
Case Study 3 CDN Tax Issues (2) 105(1) 21 year rule Distribution 35 Case Study 3 Comments Distribution to beneficiaries 21 year rule Protecting settlor/grantor spouse Lease Avoid probate and US estate tax filings 36
Three case studies Numerous issues Double tax issues Advising clients Conclusion 37