President Donald Trump’s 2017 Tax Cuts and Jobs Act made many changes to the American tax system, some of which are particularly relevant to Canadian snowbirds who own U.S. real estate.
One significant change relates to the U.S. capital gains tax rate for corporations. This rate was 35% prior to the act; as such, we never recommended that snowbirds hold title to U.S. personal-use property in either a U.S. or Canadian corporation. (This article pertains only to U.S. personal-use property, not rental property.)
Instead, we typically recommended holding title in a cross-border trust (CBT), which had— and still has—a U.S. capital gains tax rate of 20%.
The act lowered the corporate capital gains tax rate from 35% to 21%, which is almost the same as the CBT rate. Should snowbirds now hold title to U.S. property in a corporation?
The answer is still no.
Snowbirds must consider the state-level capital gains tax rate for corporations. For example, Florida’s corporate capital gains tax rate is 5.5%. If Pat, a fictional snowbird based in Toronto, owns her Naples condo in a Canadian corporation, she’ll be subject to a total U.S. capital gains tax rate of 26.5% when she sells. If Pat owns her condo in a CBT, Florida tax won’t apply and her U.S. capital gains tax liability will be 20%.
Also, under the Canadian Income Tax Act, the shareholder benefit rule applies to corporations owning property in the U.S. where the shareholder and director are Canadian residents. The rule states that the shareholder and director receive a taxable benefit of the property owned by the corporation (the ability to use the property). CRA therefore taxes the shareholder and director on the rental value of the property at 40%.
Assume Pat is the sole shareholder of her corporation. Her condo has a yearly rental value of $45,000. Because of the shareholder benefit rule, she must add $45,000 to her personal income, even if she doesn’t rent the property. CRA then taxes Pat on her phantom income at 40%.
Like corporations, American limited liability companies (LLCs) are problematic. The LLC creates double taxation when a U.S. property is sold and capital gains tax becomes due. The Internal Revenue Service (IRS) recognizes the LLC as a flow-through entity, while CRA doesn’t. CRA taxes the LLC as a company and the IRS taxes the snowbird personally. The snowbird is taxed twice without any opportunity to use a foreign tax credit for tax paid in the U.S. to reduce Canadian tax.
What the higher estate tax exemption means
Another significant change resulting from President Trump’s act is the increased U.S. estate tax exemption. Before the act, a Canadian who died owning U.S. property personally would owe U.S. estate tax at 40% of the fair market value of their U.S. property if:
- it was worth more than US$60,000; and
- the value of the Canadian’s worldwide estate was more than US$5.6 million.
The good news is the act increased this U.S. estate tax exemption to US$11.2 million.
Let’s say Pat owns her Naples condo personally. If Pat’s condo is valued at US$1 million, her worldwide estate is US$6 million, and she dies today, she won’t owe any U.S. estate tax because her worldwide estate is below the US$11.2 million exemption.
However, the exemption will sunset on Jan. 1, 2026 and drop to US$5 million, indexed. So if Pat dies on Jan. 2, 2026 and her condo is still worth US$1 million, and she still has a worldwide estate of US$6 million, she will owe U.S. estate tax on the US$1 million condo at a 40% tax rate because her worldwide estate will exceed the US$5 million exemption.
We’re pleased that the act has not changed the U.S. capital gains tax rate applicable to the CBT, which remains a good option for snowbirds holding title to U.S. property. Moreover, the CBT structure avoids probate when the snowbird owner dies. Probate is time-
consuming, expensive, and freezes the estate.
The CBT also provides creditor protection for Canadian heirs, such as a snowbird’s children inheriting U.S. property. Where a snowbird needs protection from U.S. estate tax, we recommend a cross-border irrevocable trust, which provides all the benefits of a CBT and also avoids U.S. estate tax for Canadians with a worldwide estate above the exemption.
David A. Altro, B.A., LL.L., J.D., D.D.N., F.Pl., TEP, is managing partner of Altro LLP, which specializes in cross-border tax and estate planning, U.S. real estate and immigration. The firm has offices in Canada and the U.S.