Clients who want to transfer U.S. assets to relatives without triggering tax should make good use of the US$17,000 gift tax exclusion.pawinp
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With pending changes to U.S. gift taxes, some advisors are helping cross-border clients take advantage of planned giving strategies.
Currently, the U.S. lifetime gift tax exemption is US$12.92-million but under U.S. legislation, the exemption amount will revert back to US$5.49-million (adjusted for inflation) on Jan. 1, 2026.
Only American citizens, regardless of the country in which they currently reside, or non-citizens who are domiciled in the U.S., qualify for the lifetime gift tax exemption, says Leslie Kellogg, partner and business tax practice leader at Hodgson Russ LLP in Buffalo, N.Y.
“If a U.S. client has a tremendous amount of wealth and hasn’t utilized all their exemption, we’re certainly encouraging them to do so,” she says. “There’s a great opportunity now to make really large gifts tax-free … that opportunity will be reduced significantly in 2026,” she says.
While Canadians who own U.S. assets don’t receive the gift tax exemption, they do qualify for the U.S. gift tax exclusion, for which they can give an individual a gift of up to US$17,000 a year without triggering any tax. In certain circumstances, if a donor’s gift exceeds that amount, the difference is taxable at rates up to 40 per cent and they would need to file a gift tax return IRS Form 709, Ms. Kellogg adds.
The U.S. gift tax would only be imposed on real and tangible personal property situated in the U.S., not on U.S. shares or cash held personally, notes Terry Ritchie, vice president and private wealth manager at Cardinal Point Wealth Management in Calgary.
In the case of a donor making a US$20,000 gift, the US$3,000 difference would be taxed as it’s more than US$17,000. How that tax is handled depends on the client’s citizenship, Mr. Ritchie says. If the client is a U.S. citizen, it’s just a matter of filing the gift tax return and the taxable amount would be applied against the lifetime gift tax exemption.
“For most clients, there won’t be any gift tax to pay but the obligation to file the return,” he says.
But if the client is Canadian, besides filing the return, they’ll be forking over a gift tax, which ranges from 18 to 40 per cent depending on the gift amount, says Dianne White, president and chief executive officer of Nexus Investment Management in Toronto.
“If it’s [less than] US$17,000, there’s no issue. But, when it’s over that, that’s when we get into conversations with our clients,” she says.
Handing down U.S. property
U.S. real estate is a hot discussion point these days with Canadian clients, she notes. Many are unsure of what to do with their U.S. recreational property – whether to gift it or leave it to heirs in the will.
She offers the example of a Canadian client who wants to gift her U.S. home to her child, who is an American citizen, in hopes of saving on probate. Besides not qualifying for the exemption, making such a gift is complicated as taxes would be due on both sides of the border, she says.
In Canada, gifting any property is considered a deemed disposition. “If the property had an unrealized capital gain, they would tax on 50 per cent of that gain,” she notes.
Then, in the U.S., the client would also have to pay a gift tax of up to 40 per cent based on the value of the property.
“They cannot avoid the double taxation with gifting,” Ms. White explains. “My advice tends to be to leave it in the will or sell the property before you die. They probably don’t want to go through the complex process of gifting U.S. real estate to heirs.”
She says clients who want to transfer U.S. assets to relatives without triggering taxes should make good use of the US$17,000 gift tax exclusion.
“If you have considerable U.S. assets, you probably want to put together a gift plan that is using that gift tax exclusion limit every year,” Ms. White says.
“Clients sometimes get worried about leaving money to kids who are U.S. citizens because they believe the kids will have to pay tax on it. That’s not true. They might have a reporting requirement but they’re not going to pay tax on the receipt of a gift.”
Mr. Ritchie has also found situations in which cross-border clients make decisions hastily without seeking professional advice first and then find themselves in tax limbo. He cites the example of an American client who inherited $2-million from his Canadian mother. The money was at a financial institution and the client added his cousin to the account for the convenience of managing the estate.
“But unknowingly, he gifted 50 per cent of the value of that account,” Mr. Ritchie says. “And he effectively created a tax for the gift and the requirement to file a gift tax return.”
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Deanne Gage