[Freddie]

Hi all,

Been looking into the estate tax on any of Vanguard's ETF's should I pass away. It appears to me that the US estate tax does apply to all of these ETF's but that the first $60,000 US in ETF's is without tax. Can anyone else confirm this or add to the situation?

Wondering on whether to switch from Vanguard to maybe and equivalent canadian ishare ETF so as to remove this US tax risk. Only drawback is MER differences which will have to be weighed against US tax amount.

VTI(0.07%) vs XSP (0.24%)
VWO (0.2%) vs XEM (0.82%)
VEA (0.12%) vx XIN (0.49%)

 

[leslie]

I was not aware there were any special rules for ETFs different from all other securities. Are you sure of your sources?

The rules about when tax is triggered and what is exempt for Canadians gets changed every few years, and they put in sunset clauses that create more confusion.

I would say is you are unwell, move all your investments home. If you plan on living, let the chips fall where they will and make your investment decisions to optimize your returns. But it is subjective.

 

[Freddie]

Any US securities not bought on Cdn exchanges or not held in Cdn mutual funds are subject to estate tax. Here's what I see. You've got $200k of VTI for instance. You end up getting taxed at say 20% estate tax or $40k. That sure covers a lot of additional MER expense when the expense is ($200k x (0.24% - 0.07%)) = $340 per year.

 

[CanadianCapitalist]

@Freddie: Where did you find out this info? Do you have a link?

When I wrote about this a while back, my understanding was Canadian residents with more than $2 million in US assets might be liable to pay the estate tax. But as Leslie points out these rules change every few years, so I don't know what the current rules are. Might be worth spending some time looking up on Google.

http://www.canadiancapitalist.com/should-us-estate-taxes-affect-the-choice-of-investments/

 

[humble_pie]

definitely should investigate. I'd always believed the threshold before US estate tax kicks in was very high, although i'd never heard as high as 2 mil.

i will work on this, on & off, for the next few weeks. A bit here & there when i have the time.

in meantime broker has read me a line from irs.gov stating that executors of an estate holding USD 60,000 or more from a deceased non-resident alien must (fill out a certain form, of course) & pay appropriate estate tax.

there have got to be significant exemptions and overridings of this basic provision, i would believe, because otherwise we'd be hearing deafening shrieks from millions of heirs in every province.

CC my fav ref librarian will work on this with me & i'll post references as best i can.

 

[OntFA]

My understanding is that the Bush administration laid out a schedule for the tax to be terminated for this year only. Then, starting next year, the 2001 tax rate schedule would kick in anew. That's a simplification but the below article may help a bit more.

U.S. estate tax laws are changing

 

[Freddie]

Here's another link that I found, although it is 2005 I think it still gives you an idea of what is important in the evaluation.

http://www.bdo.ca/library/publications/tax/taxbulletins/092005.cfm

Also, looks like there will is a possibility that the exemption may drop to $1 million in 2011 but have not seen anything yet.

Just another factor to take into account. Would like to get a more concrete handle on this so that I can determine whether to get out of $US ETF's and into $Cdn ETFs or not.

Anyone heard anything else?

 

[humble_pie]

i did see that article.

it's important to understand that a hypothetical $1 million exemption would apply only to US taxpayers, not to canadian taxpayers with US holdings.

in addition it's expected that the US will pass new estate tax legislation in 2010, including provisions for non-resident aliens, so the hypothetical $1 million is likely to be ancient history by this time next year.

what's worse - because it's not clearly understood - is that executors for deceased NR aliens can only claim exemption for a ratio proportion of the dearly departed's estate. The ratio is based on the percentage of US securities in dearly departed's total global holdings. For example, if only 10 % of dearly's total estate is US securities, then dearly is entitled to an exemption of only 10% of a hypothetical $1 million exemption.

it's more confusing than that because if part of the US assets are real estate holdings, then the US aggregate is treated slightly differently. This is why all the articles wind up urging the reader to Seek Professional Advice.

and it gets even worse. Authorities seem to be expecting that washington - being dead broke - will not be lenient with deceased NR aliens, who not only do not have a vote but in fact never did have a vote even when they were alive. To keep popularity & curry US votes the house might pass a reasonably generous exemption bill for US taxpayers, and then stick it really hard to all deceased non-resident aliens.

i'm no CA or fancy international tax lawyer, but after browsing the literature here are my humble hints:

hint # 1. Plan to die this year, because there's no estate tax this year.

hint # 2. Failing that, plan to die poor.

hint # 3. Failing that, do not die for many, many more years. This will give canada and all her various lobbying groups enough time to force beneficial amendments into the canada-US tax convention that will eliminate the worst injustices of any new estate tax law washington could enact in 2010.

 

[humble_pie]

oops they blew it.
and i thought we could rely on the globe & mail.

globe's rob carrick interviews terry ritchie from arizona-based Transition Financial, a firm that specializes in cross-border financial advice, on buying US real estate and on US estate tax consequences.

http://www.theglobeandmail.com/globe-investor/investment-ideas/features/lets-talk-investing/snowbirds-buying-us-real-estate/article1420968/?view=picks

ritchie puts a buy-side glow on real estate because he's in the business. But when carrick asks him to sum up canadian exposure to US estate tax ritchie says "generally there is not going to be any estate tax" if the canadian's worldwide estate totals less than $3.5 million. Oops.

and carrick confirms that the US estate tax bite will be "not really relevant." Oops.

but ritchie's own website contradicts him. The Transition Financial website discloses the truth, which is that 1) the 3.5M total belonged to 2009 and is now irrelevant, 2) it applied to US taxpayers, not to canadian, and 3) only a pro-rated portion of any legislated US exemption can be claimed by a canadian estate.

http://www.transitionfinancial.com/snowbird/snowbird_will.php

ritchie's mistake is apocryphal. There will be a huge amount of confusion over the issue of US estate tax for deceased canadians, as congress battles this year to revise the law and we sit watching. For my part i'm going to ignore confusion by watching only the CAs and the lawyers who specialize in international taxation, ie the orders of chartered accountants and the bar associations. These high orders monitor their members' performance more closely than the sub-professional advisor associations, so there is less chance of some twit getting it wrong and selling disinformation.

but i thought we could count on journalists to do their research and not get duped. Dang. The globe & mail should have made substantial efforts to ensure that their journalist is informing the canadian public correctly. Especially since this video was subsidized by the ontario securities commission.