PFIC rules
Social media blurb: Attention U.S. citizens: Gifts to
your Canadian spouse may come back to haunt you in the form of a nasty tax
bite.
Cross-Border
Spouses: Beware of U.S. Gift-Tax Surprises
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 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. www.cardinalpointwealth.com 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.
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