Estate planning for Canadians investing in U.S. vacation homes.

• Author: Wolfish, Richard G.

Many Canadians buy U.S. vacation homes to escape to a warmer climate during the winter. As a result of owning real property in the United States, these individuals must concern themselves with the manner in which the United States imposes taxes, especially on a decedent's estate. (See the Tax Clinic item, "Estate Planning. for Nonresident Aliens After TAMRA," TTA, May 198, at 337.)

No marital deduction is allowed for estate tax purpose if the surviving spouse is not a U.S. citizen, unless the property passes to a qualified domestic trust (Secs. 2056(d) and 2056A). Also, estate of nonresident aliens (NRAs) are subject to tax on U.S. property at the same rates as those imposed on U.S. citizens or residents. A U.S. citizen or resident is entitled to an estate tax credit equivalent to the tax on the first $600,000 of his taxable estate while an NRA subject to U.S. estate tax is only entitled to a credit equivalent to the first $60,000 of this U.S. taxable estate (Sec. 2102(c)(1)). Estates are taxed at graduated rates with a top rate of 55% through 1992 and 50% thereafter. There is also a 5% surtax on certain large estates to phase out the benefit of the graduated rates and the credit previously described.

Example: C, a Canadian, owns a condominium worth $200,000 in Florida. This is C's only U.S. asset. When C dies, the real property will be included in his U.S. gross estate, and will result in $41,800 U.S. estate tax (approximately 21% of the property's value). This tax is not available as a credit against any Canadian taxes because there is no Canadian/U.S. estate tax treaty provision providing such relief.

The following points should be considered.

* The NRA can purchase the U.S. property with nonrecourse debt that will be deductible for U.S. purposes.

* The NRA can purchase life insurance equal to the expected U.S. tax. However, the insurance's cost should be compared with the benefits to be derived.

* The NRA can dispose of the property before death. However, a U.S. income tax may be incurred on the disposition.

* The NRA can form a Canadian corporation to own the U.S. real property, since a foreign corporation's stock owned by an NRA is not subject to U.S. estate tax (Sec. 2104(a)).

Canadians must be careful when using a corporation to hold investments in real estate if they have control and/or enjoyment of the underlying property. Problems can arise from shareholder benefits, such as the shareholder not paying rent. However, Revenue...