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Giving with dual citizenship

25 December 2013

“I’m a Canadian, but my husband is a US citizen. We live in Vancouver and are updating our wills to include a gift to Vancouver Foundation. Do we need to consider any special tax rules?”

This situation, where one spouse is a dual taxpayer (in your case, to Canada and the US) and the other spouse a Canadian taxpayer, is quite common in today’s society. Unfortunately, each country’s tax laws are becoming more complex, and the intricacies of tax law are often beyond the layperson.

All persons resident in Canada, regardless of citizenship, are subject to Canadian tax laws. Conversely, all US citizens, regardless of residence, are subject to US tax laws. So, a US citizen living in Canada will be obligated to file annual separate income tax and information returns to both countries. To reduce the impact of double taxation and assist with compliance under each country’s domestic laws, Canada and the US have entered into a tax treaty. Unfortunately, while both the Canadian and US income tax rules are fundamentally similar, the laws are not complementary.

One significant difference is on the taxation of an individual at death. Canada has a capital gains regime that taxes the increase in value of a deceased person’s capital property, whereas the US has an estate tax regime that levies tax based on the total value of a decedent’s wealth.

When it comes to estate planning, both countries have a system that provides donors with tax incentives for gifts to charity. But the similarity ends there. With limited exceptions, only organizations registered with Canada Revenue Agency are able to issue donation receipts that can be used by the donor for Canadian income tax purposes. In contrast, US income tax law generally recognizes only US organizations that have been granted tax-exempt status under the Internal Revenue Code subsection 501(c) (3). US estate tax law does recognize certain foreign charities, provided the decedent is a US citizen.

To the question at hand: Assuming your wills properly direct a gift from your estates to a registered Canadian charity, and that you continue to be Canadian residents up to your date of death, the normal Canadian income tax rules should apply to provide a tax credit on your final Canadian tax returns.

Regarding US tax rules, in the year of his death, your husband’s legal representative may be required to file a Canadian income tax return, a US income tax return and a US estate tax return. For US purposes, the charitable donation will be recognized only in his estate tax return. Since he is a US citizen, under US domestic law he will be entitled to a full charitable deduction on his US estate tax return.

Although the outcome under your scenario is potentially favourable, the final answer is driven by the specific facts of your situation. The answer may be very different if the gift is to be made to a US charity or if the gift is made during your lifetime instead of in your will. It also depends on which spouse ultimately makes the gift. It’s even more complex if the gift is property (not cash). If the gift comprises US property, we’re approaching a Gordian Knot of complexity! Further, tax laws on both sides of the border are continuously evolving. Professional advice is strongly encouraged.

Kay Gray, CGA, TEP is a tax partner with Grant Thornton in Vancouver, BC. Kay wishes to thank Ms. Akane Suzuki, a US attorney with Garvey Schubert Barer for her assistance with reviewing this article.

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