When a U.S. citizen or U.S. resident alien is married to a Canadian spouse who is not a U.S. citizen, then property transfers between the spouses could be taxable in the United States or subject to U.S. gift-tax rules.
Most Canadians are not familiar with a gift tax or an estate tax because Canada doesn’t have such taxes. In the United States, however, gift and estate taxes exist alongside regular income tax, and can run as high as 40% of the value of a U.S. taxpayer’s wealth over a certain amount.
Inter-spousal transfers can take place via a gift, a sale or incident to a divorce. For U.S. tax purposes, a gift is treated as a transfer of property without receiving full consideration in return. For married couples where both spouses are U.S. citizens, transfers are not subject to regular income tax, expatriate tax or gift tax. But problems arise when one or both spouses are not U.S. citizens.
Sale of property to a spouse
If both spouses are either U.S. citizens or U.S. tax residents, then an inter-spousal transfer by sale or divorce is tax-free. If, however, one spouse is a non-resident alien for tax purposes, then the transferring spouse will recognize a gain or loss for U.S. tax purposes.
Gift of property to a spouse
When one spouse is not a U.S. citizen, then U.S. gift-tax rules could apply. Unlike the unlimited marital gift tax deduction applicable to U.S. citizen spouses, a gift to a non-citizen spouse is only exempt from gift tax up to $147,000 (for 2015). This rule applies regardless of whether the receiving spouse is a green-card holder or otherwise a U.S. tax resident. As a result, care must be taken to analyze transactions between spouses to determine whether a gift tax return needs to be filed to pay any gift tax.
Let’s look at an example of when this situation would apply. Neil Youngman is an American citizen living in Malibu, Calif., and his wife, Cinnamon, is a Canadian citizen living in Toronto. Neil is a musical legend. Because Neil has a Heart of Gold, he decides to give his Canadian wife a gift of $500,000 to buy a home Down By The River in Muskoka. Unfortunately for Neil, only $147,000 of the gift is tax-free. The remaining $353,000 will need to be reported on a gift tax return, and is subject to gift tax.
As you can see, failing to plan ahead for spousal transfers could leave you afoul of complex tax rules—and subject you to unexpected tax surprises.
Marc Gedeon is a CPA (U.S), CPA (Canada) and Tax Attorney at Cardinal Point, a cross-border wealth management organization with offices in the United States and Canada. Marc specializes in providing Canada-U.S. cross-border financial, tax, transition, and estate planning services. This piece is for informational purposes only and should not be considered legal or tax advice. Online readers should not act upon this information without seeking professional counsel. Tags: Canada US tax planning, Americans living in Canada
