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Listen to Foreign Real Estate Issues

This week on Hull on Estate and Succession Planning, Ian and Suzana discuss foreign real estate issues and tax planning.

Foreign Real Estate Issues - Hull on Estate and Succession Planning Podcast #90

Posted on December 11^th, 2007 by Hull & Hull LLP

Suzana Popovic-Montag:  Hi, and welcome to Hull on Estate and Succession Planning.  You’re listening to Episode #90 of our podcast on Tuesday, December 11^th, 2007.

Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by

Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada, from the offices of Hull Estate Mediation in Toronto, Ontario, Canada.  Here are Ian and Suzana.

Ian Hull:  Hi Suzana.

Suzana Popovic-Montag:  Hi there Ian, how are you?

Ian Hull:  I’m just great thanks.

Suzana Popovic-Montag:  That’s good.

Ian Hull:  As we venture into episode 90, very exciting.  We’re creeping towards 100, which will be a neat milestone as we’ve been podcasting for now about a year and a half.

Suzana Popovic-Montag:  Well, 90 weeks.

Ian Hull:  You did the math.

Suzana Popovic-Montag:  Unbelievable.  Just time does fly, it’s…by the time we’re at 100, that’s almost two years with the podcast, Ian.

Ian Hull:  That’s fantastic.  Well, its great and we’re really…I’m kind of looking forward to today’s podcast because we bump into this issue of foreign real estate so often when we’re dealing with estates, by either contentious or non-contentious.  And we’ve cleaned up, I think, the question of payment of taxes on death in our last podcast.  So let’s talk about foreign real estate and some of the issues that might surround that, just from a general estate planning and administration standpoint.

Suzana Popovic-Montag:  Well I think we see these situations arise more and more as clients come in through our doors because people do have estates that involve foreign elements to it.  And basically as a general rule, I think we can say that immovable property or property that’s like real estate that cannot be easily moved outside of a jurisdiction, will generally be subject to the domestic law of the jurisdiction that it’s actually located in.

Ian Hull:  So if we’re dealing with a Florida condominium, what we’re faced with typically is that’s an immovable property and so we’re going to be stuck with the rules of Florida in terms of dealing with it in some respects.

Suzana Popovic-Montag:  That’s right.  And I think also when we’re dealing with these situations, it helps if we can keep in mind the fact that some jurisdictions have what is called forced heirship taxes or consequences that may apply and we want to keep that in mind when we’re deciding whether or not there may be certain domestic taxes that may be payable as a consequence of death.

Ian Hull:  That’s so true because now, with an international portfolio, some people might have assets, for example, in Switzerland, which is a foreign jurisdiction that has forced heirship for example.  And, you know, we want to make sure that we’ve covered off that.  Sometimes we’ll even say to our clients, get a Will for that specific jurisdiction, given the unique characteristics of the law there.

Suzana Popovic-Montag:  It’s for sure.  And I think it’s an advisable thing to do that, to actually have counsel in the jurisdiction that the property is in, so that you make sure that there are nuances that we wouldn’t be familiar with as external counsel, that they’re actually picked up.  And I know some people even go so far as to have the Will in the foreign jurisdiction done in a foreign language, to make sure that there are no interpretation or other issues that may arise as a consequence.

Ian Hull:  So, just tying into the foreign real estate too, it’s a pretty good idea to name an executor who is a resident in the jurisdiction, to avoid probate problems that create it.

Suzana Popovic-Montag:  That’s for sure and also the bonding requirements, because often times when you’ve got an executor who is not in the jurisdiction where the deceased died, in order for that person to be appointed and to have authority do deal with the estate, there is a bonding requirement in many jurisdictions.  And if you’ve got an executor who is resident in the jurisdiction, you can avoid that hopefully.

Ian Hull:  So just let’s stay focused on the US real estate for a moment, because that’s where most typically we’re running into these scenarios.  Ownership by Canadians who are of US domicile, the real estate can be real problems.  And US estate tax is just something that you want to make sure that you have got a good handle on, especially we have cases where someone may not have lived in the US for many years, but they were US residents, that’s one important factor.  But when you’re a Canadian resident and you have US real estate, you want to be cognizant of the fact that there may be US estate tax payable.

Suzana Popovic-Montag:  Another thing that I think I certainly try to keep in mind, Ian, is the fact that when you hold US real estate through a Canadian resident corporation, I think in the past, there may have been some issue as to whether or not that might be one way to help avoid the US estate tax.  But that kind of arrangement now is no longer tax neutral, and so it’s something that we just want to sort of keep in mind going forward.

Ian Hull:  And non-spousal Canadian resident trusts, which we talked about the spousal trusts in many of our recent podcasts.  But the non-spousal one, where we have a Canadian inter vivos trust or a testamentary trust, they’re subject to, of course, the 21 year rule on the deemed realization of the capital property.  So we have to just watch that trigger point with US property as well.

Suzana Popovic-Montag:  Now Ian, just turning a little bit to some…just a very, I guess, cursory review of US estate tax consequences for US citizens who actually reside in Canada, one of the things that we certainly know is that there’s a $2,000,000 exemption that applies to US citizens.

Ian Hull:  That’s right.  And, you know, there’s this whole thing and we don’t want to get too heavy into this, but there is tax relief available for US and Canadian tax ownership issues.  And you talk about the exemption for sure for US citizens.  That I’m told is probably going to be increasing up over $3,000,000 over the years, probably by 2009, and so forth.  But that exemption and the protocols and so on, you really want to make sure you’ve sat down with a good tax advisor, an accountant or a lawyer, to give you some guidance on what to expect on property that can be certainly easily getting to the $2,000,000 range when you’re dealing with, you know, maybe a piece of real estate in the US and so forth.

Suzana Popovic-Montag:  Also there is what might come as a surprise to some people the fact that in the US, there is a gift tax that’s actually imposed on inter vivos gifts.  And that’s something that we also may want to seek some advice on from the professionals.

Ian Hull:  And again, just to give you an example of the gift tax, right now the annual gift tax exclusion exists to $12,000 to each and any number of people.  So what you’ll often see in an estate planning from the US standpoint, is that they will typically want to give their children, say you had a US resident father who lived down in the US who had significant assets, they often will send up gifts to their, say there’s some Canadian kids still living in Canada, they’ll often send up gifts of the $12,000 a year just to make sure that they stay under the taxable part of the gifting tax that’s in the US, but at the same time be able to pre-death provide some gifting for their children.  So it’s just a, you’ll see that kind of thing occur and it’s again something you may want to consider.

Suzana Popovic-Montag:  And you mentioned, Ian, something about the US/Canada protocol, what was that?

Ian Hull:  Well, over the years, the US and Canada have worked together to set up some sort of schemes and arrangements to make things more tax neutral.  And there’s a third protocol to Canada and the US tax treaty that’s been recently, relatively recently, organized between the two countries.  And it really just provides for relief of the transfers and allows for some estate planning to go cross-border without such draconian and significant tax hits, that may have occurred before the protocol.  For example, if you own US assets without the protocol, you can be hit with significant taxes, even if you live in Canada now.

Suzana Popovic-Montag:  And as part of that protocol there’s also the gift tax exemption of $115,000 annually that applies to gifts by US citizens to a non-US citizen spouse.

Ian Hull:   So these are the sorts of things that you may want to have available.  And again, you know, I mean this is detailed that is at a level that you wouldn’t typically want to get into.  Certainly we don’t want to get into it too heavily in this podcast because we need to emphasize how important the kind of technical issues that are involved with the protocol, with the tax issues, and who you should be seeing to get some guidance on.

Now…so just talking about the US estate tax again, if we look at the situation where there’s a US citizen who lives in Canada, there’s also another separate protocol that, you know, is available for that.  So, when we have someone who comes up from the US to work in Canada, there is availability in that regard too.

Suzana Popovic-Montag:  And that, I guess, you’re referring Ian to the marital credit for US citizens which will actually double the total exemption from the $2,000,000 we talked about earlier to $4,000,000 for any transfers on death to the non-citizen spouse or to a spousal trust.

Ian Hull:  And that will increase again.  I think by 2009, that may increase up to as high as $7,000,000.

Suzana Popovic-Montag:  Well that’s good.

Ian Hull:  So now if you have a non-US citizen who’s resident outside the US, they’re also subject to US estate tax on US assets.  So that’s something we want to make sure that…and, you know, this has come back to when we want to talk to our clients, we really do carefully talk about and sit down and figure who is where in the family tree.  And if there is a child who has, you know, you’re born and raised in Canada but your children may be all over the world but particularly in the US, where there’s a non-US citizen resident outside the US and that’s the classic scenario where someone might come up to run a company from headquarters down in the US from a large company, something like that.  There’s a whole tax regime that applies to them as well, once they’ve landed in Canada.

Suzana Popovic-Montag:  And when you talk about US assets, Ian, of course, I think you’re including both real estate, real property in the US, as well as stocks of US corporations as well.

Ian Hull:  That’s right.

So I think what we’ll do here today is, as I say, we wanted to maybe start to talk a little bit about some of these US interested issues that tie into estate planning.  And it just can’t hurt to get familiar with what this cross-border scenario is all about.  And even if we can begin to identify issues so that we can then be alerted to it, I think it may be worthwhile to spend some more time on our future podcasts about the US tax issues. 

So why don’t we wrap it up for today’s podcast on that point, and look forward to working through this issue some more.

Suzana Popovic-Montag:  Me too, and thanks very much.

You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag.  The podcast you have been listening to has been provided as an information service.  It is a summary of current legal issues in estates and estate planning.  It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.

To listen to other Hull On podcasts, or to leave a question or comment, please visit our website at www.hullestatemediation.com.

Our theme music is UpTempo14 by Gary and is courtesy of the Podsafe Music Network.

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Listen to Episode 89 - Payment of Taxes on Death

This week on Hull on Estates and Succession Planning, Ian and Suzana discuss the necessity of planning for the payment of taxes on death.

Payment of Taxes on Death - Hull on Estate and Succession Planning Podcast #89

Posted on December 4^th, 2007 by Hull & Hull LLP

Suzana Popovic-Montag:  Hi, and welcome to Hull on Estate and Succession Planning.  You’re listening to Episode #89 of our podcast on Tuesday, December 4^th, 2007.

Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by

Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada, from the offices of Hull Estate Mediation in Toronto, Ontario, Canada.  Here are Ian and Suzana.

Ian Hull:  Hi Suzana.

Suzana Popovic-Montag:  Hi there Ian, how are you today?

Ian Hull:  I’m awesome, thanks.

Suzana Popovic-Montag:  That’s good.

Ian Hull:  Always looking forward to our podcasts once a week to sort of sit back and reflect on relatively new and exciting stuff in the estates law world, so looking forward to today’s podcast.  I spent a bit of time on the weekend and saw our friend, Terry Fallis, who has just launched his book.  It’s out in Indigo and it’s in some of the major bookstores and he was very excited.  We missed his book launch last week because of a mediation that went too long but Terry’s very excited about it and it’s been fun to catch up with him.

Suzana Popovic-Montag:  It’s a wonderful accomplishment.  And speaking of accomplishment s, Ian, I did want to mention the fact that I saw that article that featured you and your Dad in the Bay Street Bull Magazine talking about family businesses.  And I just thought it was a wonderful expose that did a lot of credit to the two of you and your accomplishments.

Ian Hull:  Well, thank you very much.  That was fun to do and it was fun photograph to take with my Dad, which…we got in our gowns and went down on the street and took a photo.  So it was pretty neat.

Suzana Popovic-Montag:  Well, that’s wonderful, congratulations on that.

Ian Hull:  Thank you.

So last week, we were working through and pretty well completed the whole sort of analysis of charitable tax issues and how that sort of unfolds at the level that we’ve been trying to sort of portray the basic tax issues from.  Today, let’s start turning the corner on payment of taxes on death, because that is sort of a first starting point.  Everybody thinks that that’s the worst thing that can happen to them after death.  So I guess dying is worse but paying the taxes is second worst, so...

Suzana Popovic-Montag:  But when you’re dead, you don’t have to pay those so…

Ian Hull:  That’s true.  So why don’t we talk about payment of the taxes on death.

Suzana Popovic-Montag:  Sure Ian.  We know that typically the Wills will provide the actual debt clause that will direct that the payment of taxes and of debts will be paid out of the residue of the estate.

Ian Hull:  Now, an interesting thing that can develop is because of the rule that taxes are paid out of residue, inequitable situations arise where you have one beneficiary receiving, for example, an RRSP or a specific bequest.

Suzana Popovic-Montag:  And I guess that’s because there is a tax that may be associated with either of those two bequests and in that kind of situation, normally, if there is a residue clause that provides that debts will be paid out of the residue, then the individual would be entitled to that RRSP or that specific bequest net of tax, so to speak.  So they wouldn’t have to bear the tax consequences, but it would be the estate that would.

Ian Hull:  And it’s sort of an interesting planning point that a lot of people forget, and that is, of course, that when you give an RRSP to someone specifically, the tax is payable out of the residue.  So this person gets the $100,000 RRSP tax-free unless you properly plan.  So it’s a fairly basic gifting technique that we see in Wills, so we don’t want to have it come back on us later, if we’re not watching where the tax is going to be paid.

Suzana Popovic-Montag:  Because if we don’t, the truth is, the residual beneficiaries are going to resent the fact that their funding someone else’s tax liability and that someone else is getting their gift free of the tax.  So it’s just something, as you say, important that we want to keep in mind.

Ian Hull:  So another…let’s talk about real property and real estate, when we’re gifting real estate.  How do we deal with that, and the tax questions that might arise there?

Suzana Popovic-Montag:  Where a residual beneficiary, Ian, desires to get real estate as part of his or her share of the estate, so instead of taking the cash equivalent of the value of the property, they actually want the real estate itself, in those situations the individual is going to be liable to pay the land transfer tax that’s going to be associated with that property.

Ian Hull:  So it seems to me, though, it is quite unusual to see the payment of land transfer tax addressed in the Will and this is a big tax now in Toronto here.  We’ve got an even bigger land transfer tax now added to our tax burden here and a great gnashing of teeth and crying about that here in Toronto.  But it is a bit unusual to see that actually being dealt within the Will, isn’t it?

Suzana Popovic-Montag:  It is, Ian.  I don’t think I can recall too many Wills where I’ve ever seen it, but it certainly is something that, you know, is a good idea to include in a clause that actually provides the executor with the ability to transfer real property as part of a residual share without having the land transfer tax liability associated with it.

Ian Hull:  Now, we’ve talked about the separate Wills and mutual Wills in other podcasts.  That’s obviously another factor to consider in terms of taxes and payment of taxes on death.

Suzana Popovic-Montag:  That’s for sure because we know that we’ve seen many situations where there are separate Wills set up, for instance, for the private company’s shares and for other assets that don’t necessarily require probate, and then a separate Will dealing with those assets that will require probate.

Ian Hull:  And one of the things that we’re starting to see, because these primary and secondary Wills are starting to fall in more and more, is that sometimes when we’re estate planning, we’re not considering when we have a primary and a secondary Will, like you say, where the tax is to be paid.  And we’re not putting in the Wills precisely, for example, if the holding is in the secondary Will, do all the taxes in respect of the holding company get paid under the secondary Will or does the primary Will fund the tax liability that may be the subject to the holding company, those kinds of things.  So it’s a good point to press our advisors when we’re setting up our estate plan to just make sure that we might say to them look, okay this is all very fancy-dancy, two Wills.  I like the approach, but who’s going to pay the tax and where and does it set out in the Will clearly where the liability of tax will flow, because it can be a big issue.

Suzana Popovic-Montag:  Particularly, Ian, when the residual beneficiaries under the primary Will or the secondary Will are different.  Because in those situations, you know, despite all the planning, I’m actually quite surprised that, you know, secondary and primary Wills are quite sophisticated estate planning.  And notwithstanding that, as you say, we don’t many times see a clear delineation between the two Wills as to who’s responsible for those kinds of debts and taxes.

Ian Hull:  Alright.  So we’ve considered the RRSP unique situation.  We’ve considered the land transfer tax unique situation.  What about properties with accrued capital gains which get bequeathed to an individual beneficiary?  Like, for example, a cottage or something that’s, say you bought when…thirty years ago and then on the death, it’s a significant capital gain that is owed on the cottage, or something like that?

Suzana Popovic-Montag:  That’s an interesting scenario and one that quite often does arise.  And one of the things that I know you always recommend is considering whether the tax should actually be funded by a mortgage on the property or directly out of the residue of the estate.

Ian Hull:  It’s just something to consider if the residuary beneficiaries are looking to make sure that flows through without too much tax burden.

Alright, now if the residuary beneficiaries are different under a primary and a secondary Will, that’s another situation as well where it becomes very important to make sure you set out who’s going to pay what tax and on what basis in this whole primary Will and secondary Will equation.  Sometimes, for example, the operating company is going on to the daughter because she’s been in the business all these years.  But…and that goes in the secondary Will, no probate fees, all is well.  But in the primary Will, the main assets, the conventional investment account and maybe the house or something are going to the son to equalize.  In that kind of scenario, again we want to make sure that when we have secondary and primary Wills with different beneficiaries, obviously different assets as well, we really want to make sure we’ve addressed what tax liability is to be paid and where.

Suzana Popovic-Montag:  And Ian, what would you say would be the result in those situations where there is no clear distinction between which estate, so to speak, is liable for those taxes.  What would we do in those circumstances?

Ian Hull:  Well, I think the tragic part of this, and if we don’t start addressing these in our Wills carefully is, is that you’re going to end up in Court because the law is very mixed in terms of where the tax will fall because, quite frankly, it is new law in every respect.  So you’re not…you’re going to be looking to the Will and you’re going to be looking to case law that really is very light on how this is to be…this competing battle is to be figured out.  There’s some great stuff written, Clare Sullivan wrote a great article about a year and a half ago on where liability of tax lies and where it’s paid in primary and secondary Wills, and you know, her conclusion was, is that the Courts are going to be stepping in and really having to grapple with this, if it becomes a big issue and it becomes a big number.  Now, that’s obviously in situations where you’ve got significant tax liability and the amounts have to make sense before you’re going to get into those battles.  But, boy, that would be a shame to have to go to Court if the Will isn’t clear, to get some direction on what is a very important issue, and that is, who pays the tax and where from.

Suzana Popovic-Montag:  Well, that’s a good point, and I’m sure a very expensive proceeding as well.  So to the extent that we can try to predict and deal with that in advance, I think that can only help us in our estate planning.

Ian Hull:  Okay.  Well I think that touches on some of the core tax issues and payment on death.  What we thought we might do in our next podcast is, because of the fact that in Canada anyway certainly, there are lots of foreign real estate issues, situations where someone might have a condominium in Florida or something like that.  What are some estate planning issues to consider and what are some tax issues to consider in the context of those assets.  So I think we’ll try to turn to that at our next podcast.

Suzana Popovic-Montag:  I look forward to that discussion.  Thanks very much, Ian.

You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag.  The podcast you have been listening to has been provided as an information service.  It is a summary of current legal issues in estates and estate planning.  It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.

To listen to other Hull On podcasts, or to leave a question or comment, please visit our website at www.hullestatemediation.com.

Our theme music is UpTempo14 by Gary and is courtesy of the Podsafe Music Network.

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