Episode 25 - Estate Planning for Canadians with U.S. Assets with Cheyenne Reese

Mar 24

In today's episode, Nicole and Greg chat with Cheyenne Reese, a partner at Legacy Tax and Trust Lawyers, to explore the intricacies of cross-border estate planning between Canada and the United States. Cheyenne sheds light on the significant differences in tax laws, the challenges of managing assets across borders, and the implications for U.S. citizens or green card holders living in Canada. The discussion covers practical strategies for expatriation, managing vacation properties, and the importance of professional guidance to navigate these complex issues effectively.

Transcript:

Nicole 00:00:02 Hello and welcome to your Estate Matters with your hosts, my colleague Greg Brennand and myself, Nicole Garton of Heritage Trust.

Greg 00:00:09 Your Estate Matters is a podcast dedicated to everything estates, including building and preserving your legacy.

Nicole 00:00:16 If it's estate related, we'll be talking about it. We're having the conversations today that will help Canadians protect their families, their assets and their legacies tomorrow.

Greg 00:00:33 With us today on Your Estate Matters is Cheyenne Reese partner with Legacy Tax and Trust Lawyers. Cheyenne assists clients with tax, estate and trust planning. Cheyenne received her J.D. from the University of Victoria in 2005, and her Master's of Law degree in International taxation from New York University in 2006. As a result, a major part of her practice is related to cross-border US Canada transactions and estate planning, including a state gift and generation skipping tax issues. In addition, Cheyenne advises US citizens and green card holders regarding US tax compliance and US expatriation tax rules. Cheyenne was called to the British Columbia bar in 2007, and has been at Legacy Tax and Trust Lawyers since that time, becoming a principal in 2013.

Greg 00:01:22 She presents often on cross-border tax issues and estate planning issues. Cheyenne was named 2022 Lawyer of the Year in Vancouver for her expertise in tax law and in 2023, Lawyer of the Year in Vancouver for her expertise in estate planning by the best lawyers in Canada.

Nicole 00:01:41 So Cheyenne, thank you so much for being here with us today to talk about cross-border estates. And we're going to particularly talk about the Canada US issues, which is quite topical right now. So maybe you can start by telling us about yourself and how you arrived at your current role as a partner with legacy.

Cheyenne 00:01:58 Sure, yeah. I'm from Vancouver. I'm born and mostly bred, although I spent a little bit of time in New York. So after I finished law school at UVic, I decided that I really liked tax and I wanted to do some more in-depth tax learning and applied to a few schools. But New York University has at the time the best program. No doubt it still does. But I decided to go there and do my Masters of International Tax before I articled.

Cheyenne 00:02:22 And then when I came back an articled partway through, I found the one person in town that was doing that kind of work for US Canada work. I introduced myself to her and the rest is, as I say, history.

Nicole 00:02:34 Was that Elaine Reynolds?

Cheyenne 00:02:35 It was. Yeah.

Nicole 00:02:36 So she was a preeminent practitioner. And she's retired a few years ago. Yes. That's right.

Greg 00:02:41 Yeah. Well, what exactly is a cross-border estate? And is it owning property abroad, a beneficiary living in a foreign jurisdiction and or yourself or a family member who has a different nationality?

Cheyenne 00:02:52 Yeah, it's not exactly a legal term, right. It's just sort of a phrase that we can use, and it's certainly applicable when a person has real estate in another country, although sometimes even in other provinces, there are some different complexities that one wants to think about. Even having non-real estate assets in another country can also have its own complications. And so I would think of that as a cross-border estate as well. There are spouses where one spouse is a resident of one country and the other is a resident of another.

Cheyenne 00:03:22 So that's another example. And certainly when there's a beneficiary that doesn't live in Canada, that would make it also a cross border state. So when we're dealing with clients, we're dealing mostly with Canadian residents with those issues, but also US residents, for example, that have Canadian real estate or who have beneficiaries who are in Canada.

Nicole 00:03:39 So when clients come to you with cross-border estates, what are the main issues that should be considered?

Cheyenne 00:03:45 Canada and the US have a lot of similarities, thankfully a lot of differences. But the tax rules are very distinct. And so there's a presumption that they'll be similar, but they're really not. And so you really have to be careful about how each country is going to tax a particular thing. That's part of it. And then there are also the practicalities of having assets in another jurisdiction, or a decision maker who lives somewhere else. How practically can that work? Even for things like investment accounts, most institutions in Canada cannot take instructions from a power of attorney if they're not a resident of Canada.

Cheyenne 00:04:22 And so a client might have their child who lives in California and is doing really well and financially prudent, and they're the most obvious candidate, but they might not be able to practically act as a power of attorney for certain assets.

Nicole 00:04:36 Let's talk about that issue. Is it because the, say, California resident child that makes them governed by California securities regulation? Is that the.

Cheyenne 00:04:45 Issue? Yeah. Okay. My understanding has always been the securities issue. And there are many US licensed investment advisers in Vancouver and certainly across the country. And for those, it's no big deal. They can quite easily deal with those children.

Greg 00:04:59 What are the different approaches to taxation at death that may differ between the countries?

Cheyenne 00:05:03 It's a good question. So in Canada we tax on the basis of capital gains. And so we try to capture the gain in an asset at many points along the way. So for example, when you sell an asset you pay capital gains tax. If you make a gift to somebody other than your spouse, or if you transfer to those kinds of trusts and sometimes to corporations and on death, as long as the assets aren't passing to a spouse or a qualifying spouse, stress.

Cheyenne 00:05:26 But that's just sort of the premise upon which Canada taxes our people. And in the US, they don't do that. They have an estate tax many people have heard about. And they also always ask, What's Canada's estate tax? Even Canadians ask that question and we just don't have one as such. But the US estate tax at the moment only applies to a US person who has more than $13.99 million US. So that's like $18 million Canadian. And a couple of us people, we're both spouses are us really quite a large estate. So it doesn't hit all that many people. So there's a lot of concern about the US estate tax, but historically it has only hit max 1% of the population. And right now it's quite a bit lower in supposed to on January 1st, 2026, change and go back down to half of what it is now. Now that the world is a little bit different, the likelihood of it going down is more remote. So there's going to be probably less stress at the end of this calendar year.

Nicole 00:06:20 What are the main differences between Canadian and US tax, and how does that play into estate planning?

Cheyenne 00:06:27 The main difference is mostly this difference between the capturing the capital gains tax and the estate tax on death. I'll give you an example. Let's say that there was a Canadian person who's a US citizen. Let's take this as an example. And they have a $10 million piece of rental property and they paid $1 million for it. On their death, Canada is going to tax $9 million of gain. And the US wouldn't impose any estate tax because they're well below that $13.99 million threshold. On the other hand, let's say that the individual just has a whole bunch of cash. So they've got $20 million of cash. Canada is not going to tax them at all because there's no gain to tax. But the US would impose a 40% tax on every dollar over and above that $13.99 million. So that's one part of it. And then of course, there are things like rrsps which are taxes, income, but those are generally more similar the way that they're taxed between Canada and the US.

Greg 00:07:25 Is there a tax treaty between the US and Canada, and if so, how does it work?

Cheyenne 00:07:31 That's a very big question. And the answer to that is yes, of course there is one. It's primarily an income tax treaty. And so it generally helps people who are earning dividend income or rental income or, you know, business income in one country and and living in the other, for example, so that it's trying to mitigate taxes. Although there are certain types of income that one country will tax differently than the other. And so the treaty doesn't really help there. Very unusually, our tax treaty with the US also deals with estate tax. And so, for example, that Canadian capital gains tax on death can be offset against the US estate tax and vice versa, which is very great. It's also very helpful because typically for a Canadian person who owns US assets, and that includes obvious things like US real estate, like that vacation home in Palm Springs, for example, but also includes stock in US companies.

Cheyenne 00:08:22 So, for example, a Canadian person who owns Apple stock on their death, they have at a minimum of filing obligation if they have more than $60,000 of US assets. And that is like most of the population who has an investment account, unless they're exclusively in Canadian mutual funds or Canadian exchange traded funds that are going to have a lot of US stock. But the treaty between Canada and the US says even though the US rules say that a Canadian or any other non-U.S. person can only exempt $60,000 of assets from the US estate tax, the treaty says, well, actually, we're going to give Canadians a special relief. So if a Canadian person who's died has 25% of their assets in the US, they get a credit equal to 25% of what the US person would be exempt from. So the way the math works out is, as long as a Canadian couple say together, has a net worth below the US estate tax threshold, the numbers will work out just fine. But in order to get that treaty credit, an estate tax return must be filed and it must be filed on time.

Cheyenne 00:09:22 Otherwise, there is a very large US estate tax liability that can arise.

Nicole 00:09:26 So there's a lot of stuff Americans here where people were born in Chicago in 1945, and a lot of them, I think now they're aware at least that they need to be filing their annual returns. But do you want to talk to our listeners about the issues that arise in particularly personal real estate that people might not be aware of.

Cheyenne 00:09:47 Yeah, and I will say that there are fewer and fewer of those people now who come to to me and to others because it's been in the news for so long, and many people are under a misapprehension that this requirement to file only started relatively recently, and that is 100% inaccurate. It has always been the case. There's never been a time that a US citizen has not had the obligation to file, but the filing obligations have changed a little bit. But that's always been the case. I think you're referring to the principal residence exemption. So here in Canada, when we sell our homes, assuming that our house qualifies, no part of the capital gains will be subject to tax currently.

Cheyenne 00:10:24 And on the US side that's different. So even if a US person, a US citizen, owns their home here in Vancouver, for example, it doesn't matter that it's outside of the United States. If they sell the home, they're going to be subject to US capital gains tax other than on the first $250,000 of gain, or for us couple $500,000 of gain, which in Vancouver is almost meaningless. When they bought the house in 1973 for $61,000 and it's now worth 3.2 or whatever. Having said that, one big distinction that I sort of alluded to before, between the way that Canada and the US taxes on death, is that whereas Canada taxes capital gains on death, the US doesn't do that. So let's say this individual who owns their home dies still owning the home. They'll be subject to you as estate tax if they're above the threshold and not if they're not. But there is a magical increase in the cost base to that property. So if they have a US child, for example, that inherits that home and then they sell it, they don't have to pay any US capital gains tax on that historical gain.

Cheyenne 00:11:24 So it works very well for a US person who is carried out of their home in a box, as many of my clients anticipate and expect. Unfortunately, that's not always practical.

Nicole 00:11:34 So if they sell it before what happens.

Cheyenne 00:11:37 They will be paying US capital gains tax. So oftentimes where there's a US citizen spouse married to a Canadian who was not a US citizen, they can engage in some gifting between them. It has to be meaningful gifting. There's reporting that has to be done as a consequence, but there are certainly good planning options to deal with it.

Greg 00:11:56 Apart from that, when you're talking about gifting, when the families are straddled, American could be like American grandparents that lived up here. Now they've got grandkids and they're gifting cash and all that stuff. Does that create problems?

Cheyenne 00:12:10 Yeah, and it sort of depends on which way you're going. So, for example, as a general rule, a US person who's making a gift, they can make a gift to whomever they wish. Inflation adjusted this year it's $19,000 us to any person so that grandparent can make a gift to each grandchild of $19,000 us, and they don't have to tell the IRS about it.

Cheyenne 00:12:29 I have a lot of clients who think that means that that is all that they can do, and that is not correct. They can quite easily go over that $19,000. It's just that they have to file a US gift tax return and they use up a bit of their lifetime exemption. So if they make big gifts, instead of having a $13.99 million exemption on their death, they've got a $12.8 million. Who cares? For most people, it just doesn't matter. It's just a filing obligation. A bigger, sort of more stealth problem is where we've got Canadians who want to make gifts to us people, as in people who reside in the United States, whether they're US citizens or residents or what have you, because Canadians and other foreign people can really only do that without any US gift tax risk if they themselves stay below that $19,000 or limitation per beneficiary. So, for example, if I were a parent of a child who lived in the US and I wanted to give that child $300,000 to help with the down payment, I would be subject to U.S. gift tax.

Cheyenne 00:13:23 Yes, it's very difficult for the IRS to ever put that together, but why would you ever open yourself up to that obligation, particularly because the recipient of the gift, the obligation becomes theirs to pay the tax and so on. So, Canadian parent would always want to make a gift to the US resident child's Canadian bank account and let the US kid take their money out of the Canadian bank account. There's reporting that has to be done. My position is generally if your parent's going to give you a bundle of money, you can file a few forms.

Greg 00:13:55 One of the main cross-border estate administration issues that can come up.

Cheyenne 00:13:59 Yeah. And I don't personally do a lot of estate administration. But of course it comes up in planning. There are going back to like that treaty credit issue. There's being conscious of what the assets are that a particular person owns, even if they're just Canadian, only if they've got the US assets, they do have to file the US estate tax return, which people generally aren't thinking about.

Cheyenne 00:14:19 So that can be problematic. There's also the question of where is an estate resident for tax purposes. So typically it's handy if a Canadian deceased person who owns their home and some investment accounts. It's it's handy if that estate is also resident of Canada because for example, if the home is sold, you don't have to deal with the Canadian withholding tax obligations and reporting and all the stuff that goes along with that. So where the deceased has named only a non-resident of Canada to be their executor, then you're in a situation where in most circumstances, that estate is also non-resident of Canada. And so you walk into this complexity. So when we're drafting our wills, this is one way to deal with it. Certainly we suggest in most cases that if somebody has also somebody in Canada that they'd like to appoint, that they appoint those two people together, for example, and our wills, let any person who's acting appoint somebody in Canada to act with them if they find that appropriate at the time. The other thing to say is it's not the end of the world.

Cheyenne 00:15:16 There are articles periodically that come out in the Globe and Mail and so on that say you cannot name somebody who's not a resident of Canada, and I appreciate that. In Ontario, the rules are different. They do have different rules about posting bonds and all that stuff in British Columbia. You 100% can have an executor who's not a resident of Canada. It might be more annoying for them if they're the sole beneficiary. The only person who's going to do it, who cares? It just doesn't matter all that much. And then for powers of attorney, for example, it's also relevant where they reside, mostly because of that security issue that I mentioned before. Any US person who's acting in any of these roles has an obligation to file informational returns associated with having signing authority over persons accounts or having signing authority over in the states accounts. It doesn't matter. It doesn't cause them more tax. It's not going to make the estate a US taxpayer. The other thing I'd just raise on that is a lot of times people will have their powers of attorney and they'll sign them and they'll have their kids sign them.

Cheyenne 00:16:16 And their kid lives in the US, for example, or is a US citizen or whatever, if that kid has signed it and they already have the authority, then they already, even if they're not exercising the authority, they already have the obligation to report the parents accounts that are held outside of the US to the US Treasury Department and again, doesn't cause any tax, but nobody really wants to do that. And the privacy issue in part, but also there are significant penalties if it's determined that the power of attorney has not been doing that and they are found out. So we would not generally recommend any US person sign accepting the power of attorney, and certainly not even having access to the document unless and until they need it to act, at which point that absolutely fine.

Nicole 00:17:00 Those US citizens are. Maybe they've held a green card that are living in Canada. What are the main things they should be aware of? Like we talked about this primary residence issue, I'm surprised how few clients actually seem to even have been aware of that issue.

Nicole 00:17:16 Like they often come into our office and they it's the first time they've heard it. And what are some other issues that if somebody's got dual citizenship or they've held the US green card and they're living in Canada that they should be aware of now.

Cheyenne 00:17:29 Yeah, I mean, there are a whole host of them. Green cards are particularly tricky because even a green card that has expired still carries the obligation to file U.S. income tax returns and international tax returns. And there are many people out there who got their green cards in 1985, and they have them in a drawer because it's a nice little souvenir. But technically they've been required to file all the way along and be treated as US taxpayers, which is not ideal. And there are also rules that would trigger what's called the expatriation tax. If a person gives up a green card after having had it in eight out of the past 15 years. And so that's really vital for people who are moving back to think about that in advance. It doesn't apply to everybody, but where it applies, it's quite problematic.

Cheyenne 00:18:17 And those same rules apply to people who are U.S. citizens who want to give up their US citizenship. And we deal with that a lot. But there are myriad things that hit US citizens living here. Like even just I alluded to mutual funds and ETFs that Canadians might have, but those are typically taxed more heavily by the US, and they're more filing obligations. And so that might not make much sense. Or tax free savings accounts, which are tax free for us Canadians, but they're not tax free for US people. And again, some more filing liabilities. And so it might not make sense to have a tax free savings account unless you've got sufficient for tax credits and all these sorts of things. I mean well maybe just add private company shares are also that's a bigger topic and very technical. But us people who live in Canada, who have shares in private companies, whether they're a minority interest or a majority interest, can be quite costly and administratively quite complicated.

Greg 00:19:08 And is that with no matter which side of the border.

Cheyenne 00:19:11 US people living in Canada with Canadian private companies kind of in a similar way, but I would say more complicated and more punitively taxed on a Canadian who would have what's called fat b income. So like an interest in a private US company, for example, that was doing passive stuff.

Nicole 00:19:26 I just want to ask a question about people that want to give up their US citizenship, because that's we see that quite often they're here, they're going to be permanently here. They don't want to have these issues in their states. So quite often if when we've interfaced with your office and you're helping people basically get rid of their assets and in advance because isn't there an exit fee? And what are some of the strategies people can use?

Cheyenne 00:19:51 Yeah. So an individual who gives up their citizenship say similar rules for green cards, but let's just ignore that for the moment. They're subject to five different types of tax, sort of. If they are what's called a covered expatriate and a covered expatriate is somebody who gives up their US citizenship and at the same time had a net worth of more than $2 million at the time.

Cheyenne 00:20:10 Their average tax over the past five years has been quite high. We're talking like over $200,000. That doesn't typically capture people, or if they haven't been US tax compliant for the last five years. So where it's relatively simple, let's say we've got one of a couple is a US citizen, and that individual wants to give up their year citizenship, but their net worth is, say, $4 million or something like that. It's quite straightforward. They can make gifts to their spouse or to their children or whomever they wish, get their net worth below $2 million. And expatriates. It's more complicated whether there's no spouse or whether there's a spouse, but they don't want to give anything to that spouse. But in most circumstances, a person can get out of dodge if they really want to. But there are circumstances where it just doesn't make any sense.

Nicole 00:20:52 So what happens? So they have to pay a percentage of the assets over 2 million.

Cheyenne 00:20:57 Yeah. So let's say that they decided I'm going to expatriate even though I'll be a covered expatriate.

Cheyenne 00:21:01 And I will say I've certainly had some clients like that. And those ones are typically quite high net worth. And so they can't cheaply make sufficient gifts. And it's, you know, they're really doing it for political reasons. They just don't want to have anything to do with it anymore. So let's say they become expatriates, then they have a deemed disposition of certain assets. And so they'll have to pay capital gains tax other than on the first amount. It changes every year. If they have like an US equivalent of an RSP, an IRA, then that's taxed more heavily. Interest and trust or tax more heavily. The biggest one that often comes into play is if that person has become a covered expatriate and they have a US child or a US spouse, or any beneficiary who's a US person or anybody to whom they wanted to make a gift in the future, any time that gift is made or that bequest is made, the recipient has to pay US estate and gift tax at the highest rate. So let's say somebody was a covert expatriate because they had $3 million at the time that they expatriate, but by their death they were worth $50 million.

Cheyenne 00:22:02 And all their beneficiaries were us people. That's an enormous amount of estate and gift tax that's.

Nicole 00:22:07 Payable makes sense to them.

Cheyenne 00:22:09 Well, from a tax perspective, it might not make sense, but that might not matter. Right. Like it's the same with, like, residency. And if you leave Canada, you're paying capital gains tax or you're moving to this country and it's higher tax or lower tax. Live where you want to live and do the things that you want to do. And if there's tax associated with that, so be it.

Nicole 00:22:28 So one more question. There's so many Canadians that have properties in Point Roberts or Arizona or Palm Springs or Hawaii. How should they be structuring those vacation properties?

Cheyenne 00:22:39 Yeah. And the answer is I think, you know, is that it depends where the clients aren't going to be exposed to US estate tax. Like there's just no likelihood or very little likelihood then owning it personally. It's fine. No, owning it is joint tenants with their spouse is fine because then it's going to pass to the.

Cheyenne 00:22:58 So a lot of states have really terrible probate rules. For example California some states have their own estate tax like Washington. We don't provide state advice, but we know that that is is an issue. There are other ways to hold real estate. and depending on the value of the property and the value of the estate and the family circumstances, things like creating a spouse trust for this specific purpose can work extremely well. I also will say, especially now that the estate tax exemption is so high. I have a lot of clients who are okay knowing that at some point there's going to be some estate tax to pay because if they're in that circumstance, they're beneficiaries, they're going to inherit enough anyway. And they just want to have the freedom of spending time where they want to spend time. And if they sell it, great. I mean, the best advice is always just sell the thing before you die. Sometimes that's harder to time than you'd like. I will say just on that. As a practical matter, if a person has property in Washington or California or wherever, it's really important that they also have a power of attorney that's created in that jurisdiction to deal with that property so that they become incapable.

Cheyenne 00:24:00 The property can be sold.

Nicole 00:24:01 So we often say, make sure you've got a power of attorney in that jurisdiction. But isn't it correct that quite often it's a good idea to have a simple will in that jurisdiction for the property. And do you do those for your clients?

Cheyenne 00:24:14 Yes, absolutely. It's a good idea. Some states allow you to do basically a beneficiary designation for the real estate transfer on death deed. So those are really great where they're permitted. But otherwise yeah, we always suggest a separate will to deal with that. And relatively simple we will do them. Although our preference is that a local lawyer do them.

Greg 00:24:33 Any final tips for our listeners?

Cheyenne 00:24:35 I guess I would always just say to people, if they're aiming to do something that involves some other country, ask questions, or to find somebody who can answer the questions before they do the thing. Because too often people do the thing and then they think to themselves, are perhaps I should have figured out what was going to happen as a consequence of that thing.

Nicole 00:24:55 Good tips. How can our listeners find you? Because I'm sure a lot of people will have questions or they will be covered by these issues.

Cheyenne 00:25:04 Yeah, I'm at Legacy tax and Trust Lawyers. I can be found at our website, which may be new and improved by the time this goes out. We'll find out.

Greg 00:25:13 Well, thank you very much for coming in.

Cheyenne 00:25:15 Thank you for having me.

Nicole 00:25:17 This podcast is for informational purposes only and should not be considered individual, legal, financial, or tax advice. Make sure to consult the advisor of your choice to advise you on your own circumstances. Thank you for joining us for this episode of Your Estate Matters. If you like this podcast, make sure to follow it on your podcast platform of choice.

Greg 00:25:39 Whether you are planning your own estate or you're acting as executor for somebody else's heritage, trust can help partner with Heritage Trust to protect your family, your assets, and your legacy.

Nicole 00:25:50 If you would like more information about Heritage Trust, please visit our website at Heritage Trust Company, RCA.

Greg 00:26:03 This podcast is produced by Podfather Creative.