Monday, 5 October 2015

The Net Investment Income Tax and American Trusts held by Canadians in Canada

Trust have often been used as an entity to safeguard a Canadian testator from exposure to US estate tax. Assets including real estate held by an irrevocable US trust do not form part of the settlor's (grantor) estate once he or she dies. An irrevocable trust is a commonly used entity not only for US assets but also used by Canadiansin succession planning as it also shields a Canadian testator against the Canadian deemed disposition of capital assets on death. An irrevocable trust formed in the United States to hold US real estate by a Canadian would therefor shield the Canadian from US estate tax levied on the US real estate on death assuming the US real estate was subject to US estate tax at the Federal level and at the State level. The US real estate would also not be subject to the deemed disposition rules in Canada which apply on death and deem all assets that was held by the decedent to have been sold at fair market value just before death. However since January 1st, 2013 undistributed investment income earned by a US Trust will be subject to a 3.8% Net Investment Income Tax. Pertaining to US real property that was passively held, rental income and gains from the sale of such property by the Trust will therefore be subject to the Net Investment Income Tax. The Net Investment Income Tax applies to undistributed investment income where such income exceeds the dollar amount for which the highest tax bracket for trusts and estates begins. This is not a high threshold as the highest tax bracket for 2015 for estates and trusts begins at $12,300.

Thursday, 1 October 2015

Please Vote for my Blog

My blog is up for nominations. If you enjoy my blog then please vote. See the following link to vote:

Wednesday, 29 July 2015

Identity Theft and the IRS

Please see my latest article, "Identity Theft and the IRS", in Canadian Tax Highlights July, 2015.

Wednesday, 22 July 2015

Please nominate

My blog has entered into a contest for best tax blog. I would be grateful if you could nominate this blog as well as the contest considers the number of nominations a blog receives. To nominate please click here.

Thursday, 25 June 2015

An ode to Drake 150's shrimp sandwich

This has nothing to do with tax or succession planning but with the execution of a simple shrimp sandwich executed by the chefs at Drake 150 - a restaurant here in Toronto. The sandwich which I try to have at least once a week takes me back to my childhood where my mother as a medical doctor was often gifted with boxes of prawns from the Atlantic ocean from her patients who worked at American owned fishing company SAIL.

Although my mother is still working in Suriname - I am not certain whether SAIL is still in existence or whether she is still gifted boxes of prawns. The prawns / shrimp from the Atlantic ocean have this taste which farmed shrimp from South East Asia could never achieve. As an FYI - the difference between prawns and shrimp is the placement of the gills.

It is difficult here in Toronto to buy shrimp/prawns like this unless one treks to the St. Lawrence Market which is a food paradise but which is difficult for me to make time - work, dogs, children, husband, garden ..... As such I am grateful that Drake is nearby my office. I finally asked today the origin of the shrimp/prawn and found out that it was the Pacific ocean. Now I can only hope that the sandwich survives the mandatory menu change which happens ever so often does not do away with my sandwich.

Wednesday, 4 February 2015

Proposed Obama Budget proposed reforms to the Estate and Gift tax sections of the Internal Revenue Code

On Monday, the 2nd of February, 2015, the Department of Treasury released the Obama Administration’s 2016 Budget (Green Book). As the Republicans won the majority of seats in the House of Representatives in the 2010 midterm elections, it is likely that the Budget will not become law. But the U.S. is still in a deficit even though it is deficit has been decreasing as reported in The Wall Street Journal  and is currently approximately $483.35 billion – a figure that should continue to give concern to tax practitioners and rightly so. The following provides a summary relating to the proposed changes estate and gift tax sections of the Internal Revenue Code by the Budget.

Estate Tax and Generation Skipping Tax (GST).
Currently both the estate tax and the generation skipping tax exemptions are indexed for inflation. The exemption is $5.43 million with the top rate set at 40%. The GST exemption allows planners to use the exemption to transfer $5.43 million currently into a trust wherein the beneficiaries are two or more generations younger than the settlor. Such trusts are usually referred to as Dynasty trusts.

The Budget proposes to reduce the Estate and the GST tax exemption to its 2009 levels. In 2009 the exemption was $3.5 million. The Budget also proposes to increase the top rate to 45%. The Budget proposes to restrict the GST exemption only to the 90th year of the creation of a trust.

Gift Tax
Currently the gift tax is tied to the estate tax. One can gift up to $5.43 million during one’s lifetime but must keep track of gifts over $14,000 to any one person as such h gifts will count against the eventual estate tax exemption amount. No need to worry about exceeding the limit where the gift is to a U.S. spouse. For 2015 the annual exclusion to a non-US spouse is limited to $145,000 per year. Any amounts gifted over the exclusion must be reported on IRS Form 709. It is advisable for taxpayers to keep copies of their Form 709s filed so that it is easier for the executor to calculate the estate tax exemption.

The proposal aims to untie the gift tax exemption from the estate tax exemption. The life time gift exemption would be reduced to $1 million.

 On page 204 of the Green Book, the proposal is to aims to define a new category of gift exemptions and would impose an annual limit of $50,000. This new category will be indexed for inflation. On page 205 of the Green Book:

Thus, a donor’s transfers in the new category in a single year in excess of a total
amount of $50,000 would be taxable, even if the total gifts to each individual donee did not exceed $14,000. The new category would include transfers in trust (other than to a trust described in section 2642(c)(2)), transfers of interests in passthrough entities, transfers of interests subject to a prohibition on sale, and other transfers of property that, without regard to withdrawal, put, or other such rights in the donee, cannot immediately be liquidated by the donee. (emphasis mine).

Sunita Doobay TaxChambers LLP

Tuesday, 27 January 2015

Award Received from IBFD and Acquisition International

Thrilled to have received 2015 Best in Canada for Cross-border Taxation and Succession Planning from the IBFD and Acquisition International. The IBFD has always meant so much to me with its authors such as the renowned Kees van Raad whose commentary guided myself and my team members of the Jessup Moot in law school in the preparation of our factums. Great memories. And yes in practice I continue to rely on the IBFD and its resources.

Tuesday, 20 January 2015

SR&ED Success in Tax Court

Please see attached the January 2015 issue of Thomson Reuters’ Privately Held Companies and Taxes. In this issue we discuss Les Abeilles Service de Conditionnement Inc., a tax court win for the SRED claimant.As can be seen from the table of cases, a tax court win is very seldom in SRED cases - likely because of the difficulty in differentiating between SRED and "routine engineering".