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.

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