When a U.S. Citizen or U.S. Resident Alien is married to a Canadian spouse and the spouse is not a U.S. citizen, then inter-spousal property transfers between the spouses could be taxable in the U.S. or subject to U.S. gift tax rules.
Most Canadians are not familiar with a gift tax or an estate tax. The main reason of course is Canada doesn’t have an estate or gift tax. In the U.S., however, the gift or estate taxes are a tax in addition to regular income tax and can run as high as 40% of the value of a U.S. taxpayers 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 between them 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 (2015). This rule will apply regardless if the receiving spouse is a green card holder or otherwise a U.S. tax resident.
The result is care must be taken to analyze transactions between spouses to determine if a gift tax return needs to be filed to pay any gift tax.
Let’s take an example of when this situation would apply. Neil Youngman is an American citizen living in Malibu, CA and his wife, Cinnamon, is only a Canadian citizen living in Toronto, Canada. 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, not planning ahead for spousal transfers could result in running afoul of complex tax rules that leave you subject to unexpected tax surprises.
Contact us today to discuss how Gedeon Law & CPA can help cross-border Canadian families with their cross-border tax planning.