Cross-border Estate Planning: Effect of Fifth Protocol to the Canada-U.S. Income Tax Treaty
By Nadja Ibrahim and Beth Webel, PricewaterhouseCoopers LLP
On September 21, 2007, after nearly ten years of negotiation, the United States and Canada jointly released the fifth Protocol (the Protocol) to the Canada-U.S. Income Tax Convention (Treaty). The Protocol includes
important changes that may affect cross-border estate planning in the areas of:
• Charitable deductions; and
• Taxes imposed by reason of death on:
− Registered Retirement Savings Plans (RRSPs); and
− U.S. stock options.
These changes will become effective the later of January 1, 2008, and the date the Protocol is ratified.
Charitable Donation Planning
Paragraph 1 of Article XXIX-B (Taxes Imposed by Reason of Death) of the current Treaty will be replaced by new language that restricts the cross-border donation planning opportunities for Canadian residents who are not U.S. citizens.
Under the existing provision, the U.S. provides an estate tax deduction if a Canadian resident donates U.S. property to a U.S. or Canadian charity. However, this tax relief will no longer be available under the new Protocol. As a result, a Canadian decedent who donates U.S. assets can avoid U.S. estate tax only if the U.S. property is donated to a U.S. charity. This restriction does not apply if the Canadian resident is a U.S. citizen.
Under the fifth Protocol, Canadian-resident decedents that choose to make charitable donations to U.S. charities may elect the value of the gift for purposes of determining the proceeds of disposition of the donated property. The elected price cannot be lower than the purchase price or
higher than the fair market value of the property. This provides the estate with the opportunity to eliminate Canadian capital gains taxation on the donated property.
Taxes Imposed at Death on RRSPs and RRIFs
Canadian residents: Canadian-resident decedents who die owning U.S. securities in an RRSP or RRIF may be subject to U.S. estate tax. The new Protocol allows Canadian-resident decedents to claim a foreign tax credit on their Canadian terminal income tax return for U.S. estate taxes paid on the fair market value of U.S. investments in their RRSP or RRIF. The foreign tax credit is limited to the amount of Canadian federal income tax. To claim the foreign tax credit, Canadian income tax must be triggered on the date of the decedent’s death.
Originally published in the STEP Journal (Vol16Iss9).
