If you are acquiring a vacation home in the USA, you can avoid common pitfalls and take full advantage of opportunities by using appropriate structures to preserve your assets and do so on a tax-effective basis.
Vacation home in USA
My client, David, recently told me that as a so-called “snowbird” going to Florida each winter, he wanted to acquire a vacation property there. I advised him that a Canadian resident who dies owning property with a U.S. situs in law, such as the Florida Property which is real estate located in the United States, may be subject to U.S. estate tax at an escalating scale up to a maximum rate of 40%.
Accordingly, unless proper tax planning is undertaken by a Canadian resident investing in U.S. situs property, there can be an onerous tax burden on death or from making a gift.
Canadian Discretionary Family Trust
Instead, I suggested he consider establishing a Canadian Discretionary Family Trust instead of a US Family Trust to hold the American vacation property. Thus, on the death of either David or his spouse, there will be no exposure to U.S. estate tax. In addition, if the Trust sells the property for a capital gain, the Trust is viewed as a flow-through vehicle for U.S. tax purposes, and so the long-term capital gains rate of about 23% would apply to the individual Canadian beneficiaries. Because the top rate in Ontario for capital gains is about 26.5% and a foreign tax credit will be available to offset Canadian tax, only 3.5% tax would be payable in Canada.
