If you own a vacation home in the United States, you may have been advised by a friend or even an American lawyer to put your children on title by donating an interest in the property to them. This recommendation is often made to ensure that the property will be transferred to them free of probate in the State in which the property is located. Although this objective will be attained, such a transfer can have potentially dire tax consequences in the United States for you as a Canadian.
In the United States gifts of US situs assets such as your vacation home are taxable. This tax is referred to as the US gift tax. The scheme of this tax is that a person who disposes of property for free or for less than the property’s fair market value must pay a tax based on the full market value of the asset.
The first step in evaluating the US tax liability on a gift is determining its taxable value. This is determined by evaluating the fair market value of the gift and deducting the applicable exemption amount to which the taxpayer is entitled. Canadians are entitled to two annual exemption amounts: (1) a $152,000 USD exemption for gifts between spouses and (2) a $15,000 USD exemption for gifts to persons other than spouses. The first exemption amount is annually adjusted for inflation, but the second exemption is not subject to annual adjustments.
The application of these rules can be illustrated with the following example. John is the sole owner of a Florida property with a current fair market value of $400,000 USD and he wishes to avoid probate by putting his wife, Linda, and his son, Mark, on title. Accordingly, he donates a 25% interest to Linda and a 25% interest to Mark, which are both valued at $100,000 USD to Linda and to Mark. The gift to Linda will not be taxable because John can claim the benefit of the $152,000 USD exemption for spousal gifts. However, John will be subject to US gift tax on his gift to Mark because the fair market value of the gift exceeds the $15,000 USD exemption. The taxable portion of this gift will be $85,000 USD.
Gifts that are in excess of the applicable exemption amount are taxed at a rate of 40%. This means that John’s tax liability on his gift to Mark will be $34,000 USD. Failure to report this gift in the US and pay tax on it will result in the accrual of interest and penalties. John could have put in place a plan to avoid probate on his Florida vacation home without triggering US gift tax.
The takeaway from this blog is that you should remain informed of the rules regulating gifts in foreign jurisdictions before making them. The United States and Canada have different tax rules for gifts. What may be customary and standard practice in Canada is not necessarily so in the United States. If you are contemplating making a gift of US property to a family member or a friend, we strongly recommend that you consult one of our lawyers before doing so for advice on the applicable US and Canadian tax rules and on potential alternative routes for achieving your objective without triggering tax in either the United States or Canada.
The comments offered in this article are meant to be general in nature and are not intended to provide legal advice regarding any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate for your circumstances.
About the author
Shlomi Steve Levy is a Partner of Levy Salis LLP and is a member of the Quebec Bar, the Law Society of Ontario (L3), the Society of Trust and Estate Practitioners, and the Canadian Bar Association.