Gifts to your Canadian spouse may come back to haunt you by means of a nasty tax bite::Cross border tax planning

06/03/2016 18:05


Cross-Border Spouses: Beware of U.S. Gift-Tax Surprises


When a U.S. citizen or U.S. resident alien is married to some Canadian spouse who is not a U.S. citizen, then property transfers relating to the spouses could be taxable in the United States or susceptible to U.S. gift-tax rules.

Most Canadians do not know a gift tax or an estate tax because Canada doesn't need such taxes. In the United States, however, gift and estate taxes exist alongside regular tax, and may run as high as 40% with the value of a U.S. taxpayer's wealth more than a certain amount.

Inter-spousal transfers can take place via a great gift, a procurement or incident to a divorce. Associated Info about Canada-U.S. cross-border wealth management. For U.S. tax purposes, a gift is treated being a transfer of property without receiving full consideration in turn. For maried people where both spouses are U.S. citizens, transfers are not at the mercy of regular tax or gift tax. But problems arise when one or both spouses usually are not U.S. citizens.

Sale of property to some spouse


If both spouses are generally 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 often a non-resident alien for tax purposes, then a transferring spouse will recognize a gain or loss for U.S. tax purposes.

Gift of property to your 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 some non-citizen spouse is only exempt from gift tax up to $147,000 (for 2015). This rule applies regardless of whetherthe receiving spouse is a green-card holder you aren't a U.S. tax resident. As a result, care must be taken to analyze transactions between spouses to ascertain whether a great gift tax return should be filed to spend any gift tax.

Let's examine an example of if this situation would apply. Neil Youngman is an American citizen living in Malibu, Calif., with his fantastic wife, Cinnamon, is really a Canadian citizen moving into Toronto. Neil is really a musical legend. Because Neil features a Heart of Gold, he decides to give his Canadian wife a gift of $500,000 to purchase a home Down By The River in Muskoka. Unfortunately for Neil, only $147,000 from the gift is tax-free. The remaining $353,000 will need to be reported on a present tax return, and is subject to gift tax.

As you can see, failing to plan in advance for spousal transfers could give you afoul of complex tax rules-and subject that you unexpected tax surprises.

Marc Gedeon is often 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 focuses on providing Canada-U.S. cross-border financial, tax, transition, and estate planning This piece is for informational purposes only and really should not be considered legal or tax advice. Online readers shouldn't act upon this info without seeking professional counsel.