Episode 61 - Understanding Cross-Border Tax and Estate Planning with Jonah Spiegelman
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Nicole Garton 00:00:02 Hello and welcome to Your Estate Matters presented by Heritage Trust. Your Estate Matters is a podcast dedicated to everything estates, including building and preserving your legacy. If it's estate related, we'll be talking about it. We're having the conversations today that will help Canadians protect their families, their assets and their legacies tomorrow.
Hello and welcome to your Estate Matters. I'm Nicole Garton. Today we're tackling one of the most complex and misunderstood areas of estate planning in Canada, planning for individuals and families who have ties to both Canada and the United States. There are well over 1 million US citizens living in Canada. Many of them were born in the U.S. and moved here decades ago. Others are Canadian born but acquired US citizenship through a US citizen parent or later through naturalization. Others are not U.S. citizens at all, but they're still U.S. tax residents, former long term green card holders, or Canadians with U.S. situs assets. Many do not realize that the United States may continue to tax them or require ongoing reporting, even after years in Canada, and that death can create tax and administration issues in both countries.
Nicole Garton 00:01:21 The stakes are enormous. Get the planning wrong and a family can face double taxation penalties. Loss of treaty benefits and an estate administration process that spans two countries with conflicting rules. Get it right and you can coordinate the two systems to minimize tax and protect the people who matter most. I'm delighted to be joined today by one of the leading cross-border talks in estate planning lawyers in Canada.
Jonah Spiegelman is the principal at Polaris Tax Counsel in Vancouver. He's licensed to practice law in British Columbia and California, which means he can advise and implement strategies on both sides of the border. He holds a JD and an MA from the University of British Columbia, and a Bachelors of Science from the University of Oregon. He is the co-author, with David Altro, of the book Americans Living in Canada - Smile, the IRS Is Watching You, which has been excerpted in The Globe and Mail. He has years of experience advising clients on estate planning, trusts, business structures, residency and migration planning, and US tax compliance. Before joining Polaris, Jona led the international tax practice at a regional firm in Vancouver and ran his own boutique cross-border practice.
Nicole Garton 00:02:33 Jonah, welcome to Your Estate Matters. Thank you so much for joining us.
Jonah Spiegelman 00:02:45 Pleasure. Thanks for having me.
Nicole Garton 00:02:46 It's great to have all your expertise available for our listeners. So you've spent your career at the intersection of US and Canadian tax law. What drew you to this area, and how did you end up building a practice focused on cross-border planning?
Jonah Spiegelman 00:03:01 Well, it's an interesting story. Maybe too long for the current environment, but the key was that I happened to join a firm that specialized in this as a result of lifestyle choices I was making, but the interest was there because I was born in the US. We moved to Canada when I was a toddler, and so as I learned all of the material, it was so relevant to my personal situation that I felt like I really wrapped my arms around it. And I can relate to clients who are in a similar situation.
Nicole Garton 00:03:32 And have you kept your citizenship?
Jonah Spiegelman 00:03:34 Oh yeah. Yeah. I've spoken with so many about renunciation and I think I'm on the same page as most.
Jonah Spiegelman 00:03:41 It's interesting to know about, but there's something about it that I'm happy to keep it.
Nicole Garton 00:03:45 I've seen both sides of the lane, people renouncing and people keeping it. And I mentioned to you, I have three children who are dual citizens as well. So…
Jonah Spiegelman 00:03:55 Right. It's not as bad as all that.
Nicole Garton 00:03:57 You don't think so?
Jonah Spiegelman 00:03:58 No. Yeah. Totally manageable.
Nicole Garton 00:04:00 So, speaking of that, you co-authored a book called Americans Living in Canada - Smile, the IRS is Watching You. That title alone tells a story. What was your impetus for writing it and what were you seeing in your practice at the time?
Jonah Spiegelman 00:04:13 Well, this was a book that I wrote during really the initial stages in the late 2000, when the US was really becoming a lot more interested in compliance for, you know, citizens who were living elsewhere. And this is when the f bar sort of awareness really began, even though it had been on the books for decades. and so I felt like there was a lot of need out there for increased awareness and getting people sort of back on track before the hammer came down on them.
Nicole Garton 00:04:47 So not everybody's going to know what an f bar is, right?
Jonah Spiegelman 00:04:50 So the foreign bank account reports this is not actually an income tax rule in the US. It's under much more of an anti-money laundering type of a legislative regime. But it does require US citizens to annually disclose foreign bank accounts that they have signing authority over. And so this is like I say, it's not that it wasn't a new thing, but it certainly became, I think, identified as a revenue source for the IRS at that time. And ever since it's become, you know, increasingly important to keep up with those obligations.
Nicole Garton 00:05:21 And so if you're a US citizen, is that even if you live here, is that something you have to do every year?
Jonah Spiegelman 00:05:27 Absolutely, absolutely. If you aggregate balances of over $10,000 in any given year, you need to report those accounts.
Nicole Garton 00:05:36 So when dual citizens are U.S. persons living in Canada come to you, what are the most common misconceptions they have about their tax and estate planning obligations?
Jonah Spiegelman 00:05:46 Well, I'd say the most common is a misunderstanding of the continuing obligations that they have in the US.
Jonah Spiegelman 00:05:51 It's a unique country in the world that requires annual tax compliance, regardless of where you live. And so just because you moved away and don't have any assets or income coming out of the US, does not mean you're off the hook from an income tax reporting side of things. And you know, on estate planning, there's so many rules, not only in Canada, there's a lot of rules, but there's a whole different host of rules on the US side. And marrying those together into a comprehensive plan that achieves your objectives is, you know, it's really important and not obvious at all.
Nicole Garton 00:06:24 So let's set the foundation for our listeners. The US, as you say, is one of the only countries in the world that taxes its citizens on worldwide income, irrespective of where they live. So what does that mean in practical terms for a US citizen who's been living in Canada even for many, many years?
Jonah Spiegelman 00:06:42 Well, it means, first and foremost, a second accounting bill every year, maintaining compliance is often little more than hiring a separate CPA or a different CPA that has a capability of filing in both countries.
Jonah Spiegelman 00:06:57 The vast majority of Canadian resident Americans don't have any US tax to pay, because we have a mechanism of treaty credits, and also just within the domestic law that prevents, you know, if you're living and working in Canada, you'll pay Canadian tax. It's a higher rate of tax than the US imposes. So there's no tax to pay. There's a few loopholes that I'm sure we'll get to in the course of the conversation or pitfalls that need to be aware of, but for the most part, it's just an extra tax return.
Nicole Garton 00:07:27 So at death, both countries impose a form of tax. So in Canada we have the deemed disposition which triggers capital gains tax. The US has gift in estate tax. So how do those regimes interact? And where do conflicts arise.
Jonah Spiegelman 00:07:44 Right. So it's a really important topic. Oftentimes we say Canada doesn't have an estate tax. That's not quite true because there's a deemed disposition of all assets. That's, and that capital gains tax that may be realized there is payable in the final year.
Jonah Spiegelman 00:07:59 On the US side, it's a completely different regime, totally divorced from income taxes based on the fair market value with a very healthy exemption. So sometimes it becomes a matter of focusing on which is going to give rise to actual dollars to pay in the estate and focusing your planning efforts there. The treaty does a really good job of avoiding double tax. It's not perfect. I think the area where you have the biggest jeopardy is in relation to gifts. because the treaty has no system of crediting out, Canadian tax versus US gift tax and the other way around. And you can end up with all kinds of double tax problems. And so, for example, clients often come to me and say, “well, should I just add my kids to the title of the house?” And I thought, you know, that's the worst idea of all of the things we could do. Simply giving your assets away is not the good one. Many other plans that are much more tax efficient, even though it sounds like the simplest.
Nicole Garton 00:09:01 So is it correct that the exemption is 15 million US currently?
Jonah Spiegelman 00:09:06 Right. So every US citizen has an aggregate lifetime exemption amount that covers both gifts and estates. Currently it's around 15 million indexed to inflation. So it picks up a little bit every year that for the vast majority of people, takes care of all of those problems. And all of all we really need to do is make sure that we're not stepping in any traps. Now, on the Canadian side, we're much more focused on capital gains. So dying is a capital gains tax event. Making a gift as a capital gains tax event, moving away from Canada as a tax as a capital gains event. So we have to be managing the cost basis. And if you're paying tax in one country, you want to make sure you're getting credit for it and the other. And that's really the key.
Nicole Garton 00:09:47 So I've got a question about spouses. So if people are married, do they get a $30 million exemption or.
Jonah Spiegelman 00:09:55 Well, it sort of works that way and it can work that way.
Jonah Spiegelman 00:09:58 But typically what we have in the US is something called portability. So if you are a US person and you don't use all of your exemption, you can port it over to a surviving spouse, which effectively doubles that exemption. It's not always perfect, and it really depends on if your spouse is a US citizen or not, because the rules are completely different. But you know, in Canada we have a rollover, so there's no tax payable when you die and you leave your assets to a spouse. Under the treaty we can double up your basic exemption. If you're American and your spouse is not, you're going over that. Then we're looking at special US trusts that have all kinds of complexities to them that are really sort of a last resort in my view.
Nicole Garton 00:10:39 So, question: in Canada, if you have a legal spouse and you die and those assets are going to your spouse, as you said, they're often capital gains exempt until the last to die. But what about putting your spouse on title if you are their American? Is that considered a gift? How does that work?
Jonah Spiegelman 00:11:01 Well, the gifting rules really depend on what we're talking about.
Jonah Spiegelman 00:11:06 So if you add someone to title of real estate that's considered a present gift for US tax purposes, which again, there is no unlimited spousal deduction if the recipient spouse is not American. So we have to be careful about that. There's an annual exemption. If you're adding someone to the name on a bank account, then what the US regulations say is that the gift occurs on withdrawal from that account, not on contribution. So it's really important to have a pretty fine understanding of how these rules come into play and act accordingly to make sure you stay on site and achieve what you're trying to achieve.
Nicole Garton 00:11:40 So what about a lot of Canadians own real estate? Maybe in Point Roberts or Palm Springs or Arizona? What does that mean in respect of Canadians that are buying property in the US? Do the gift rules apply? How does that work?
Jonah Spiegelman 00:11:58 Right. So yeah, that's I mean that is where this practice started for me is sort of a snowbird planning practice. And certainly back in the, you know, around 2010, 2009, that sort of time when the dollar was at par and our interest rates were very low, the US was coming out of their housing crisis.
Jonah Spiegelman 00:12:16 Prices were rock bottom. And so it was really a buying frenzy. And there was a lot of planning that had to go into that because people coming from a Canadian perspective just didn't really understand how those rules worked. And so there's a whole sort of universe of planning that's available for those people. The key, I think, is to get the advice before you make the offer, because sometimes it really is important how that offer’s structured, whether you want to put some kind of planning in place, whether it's an entity or a trust or just, you know, estate planning type documents, you have to understand those issues and really make that plan before you purchase in a perfect world.
Nicole Garton 00:12:57 So a semi-retired couple buys a golf condo in Palm Springs. What would be standard advice about how they do that?
Jonah Spiegelman 00:13:09 Well, it really I mean, if it's a strictly personal use place that they want to go use for lifestyle purposes, then really what we're talking about is succession planning. And what happens if you either become incapacitated or pass away while you still own that property.
Jonah Spiegelman 00:13:24 And, you know, a lot of times I'm not the type of lawyer who has a one size fits all for every client. I think it really is important to start with the objectives and the facts, and you know where we are now and what we're trying to get in the future. In Palm Springs and California especially, I do not like to rely on probate, because probate a will in California is not only expensive, time consuming, it's very challenging. Furthermore, state law limits the amount an attorney can charge for probate fees. So if they think it's not worth it based on the percent of the value that they're going to be able to earn on that file, they just won't take it. And it can be a real challenge. So I always prefer to structure title to not leave it up to probate.
Nicole Garton 00:14:10 So if they owned it jointly, that would be the last to die. It would go into a trust.
Jonah Spiegelman 00:14:14 Right? So if you've got a husband and wife and they take title as joint tenants with a right of survivorship, of course, you know, one spouse passes away, the other can just sell it there automatically.
Jonah Spiegelman 00:14:22 The owner of that property, which is great. The timing can be challenging on that one. You never know how much time you have in any given period of one's life. So I always start with, okay, in a perfect world, if everything goes according to plan, how long are you going to keep the property? And what circumstances might cause you to want to sell it? Right? And then is it feasible? You know, no one has a crystal ball. So we have to do our best with what we can. If the answer is we want to use this place till we can no longer use it, we should probably put some structural protection in to prevent that property from going into probate.
Nicole Garton 00:14:57 And so what are the main structures? Is it a trust? What is it?
Jonah Spiegelman 00:15:00 I mean there's trust structures for sure. I have put in place many, many trusts. And there's different types of trust depending on the different issues that are in play. You can also use entities that don't die when the owner of that entity dies.
Jonah Spiegelman 00:15:15 and so by putting the title in, like for example, a partnership of some kind, the partnership is on title and the ownership of that is governed in BC according to your local documents.
Nicole Garton 00:15:28 So let's talk a little bit more about this Canada-U.S. tax treaty. You say it does a lot of things, but it's not perfect. Like where is it currently falling short for people?
Jonah Spiegelman 00:15:38 Well, I think, you know, harkening back to what we talked about earlier, I think the gifts is an area where there's a real shortcoming in the treaty. We have a special, you know, quite unique provision. Article 29 B of the treaty provides the, you know, a credit for Canadian taxation on death versus US estate tax. No such coordination on gifts. So we have to be really careful around doing anything that can either be considered a gift or is actually a gift. So that's one area for sure. I think the other area really where it falls short is there's some entity characterization problems. The classic one is the limited liability company in the US is taxed fundamentally differently in the US versus Canada.
Jonah Spiegelman 00:16:23 And because CRA has a pretty Aggressive view on how LLCs should be taxed. You can run into some serious problems. They don't get treaty benefits because they're not taxed at the entity level. That's a real problem that I deal with monthly in my practice. You know, some of the newer sort of financial products that are out there just don't get covered. So the Resp type things, the TFSA is not yet fully recognized as a tax deferred entity or type of account. So those sorts of things a little I feel like the treaty moves very slowly. They don't update it very often. It's many years between updates. It's hard enough to get tax legislation passed in one country, let alone having two countries agree on new rules. Right. And so a lot of the sort of newer tax deferred accounts can be really problematic, notwithstanding an excellent treaty that we rely on for many important things.
Nicole Garton 00:17:19 So let's talk about the main planning tools. So you've got a dual citizen. Is there anything particular they should do in their will, for example?
Jonah Spiegelman 00:17:28 Well, I think, you know, for a lot of people, the first thing I think that people need to understand is that a large proportion of the estate planning sort of bar in Canada doesn't understand whether there's a problem or not. All they know is if there's Americans involved, I'm not comfortable. Okay. So there's a lot of people who are having trouble finding proper help to, you know, winnow out. Is there an issue, is there not an issue. Right. And just getting any advice at all? You know, I have known very, very competent estate planning counsel here in British Columbia who in their, you know, standard forms are excluding anyone who's a US person. Just because I don't know, it sounds dangerous. It's not always dangerous, right? If you understand how to manipulate those rules, and manipulate, I think, is actually the wrong word. How did you just work in that context? then you can find solutions. and to be honest, I would say a majority of US citizens in Canada don't require any special planning in their wills.
Jonah Spiegelman 00:18:41 Right. But how are you going to know whether you do or you don't? Right. So the facts really drive that complexity, and the complexity drives the sophistication required in those planning documents. So I would say most of the time it's a look at the facts, rule out the major problems and prepare something that doesn't have any problems with it. Other times if they’re, you know, higher net worth or have more complicated structures or assets, then you do need specific planning that can only really be implemented by someone who understands the issues.
Nicole Garton 00:19:17 So let's talk about what the big minefields might be then. So just so people know where the danger areas are. So I heard from you. Significant inter vivos lifetime transfers to adult children can be an issue. Is that correct?
Jonah Spiegelman 00:19:32 It can definitely be an issue.
Nicole Garton 00:19:33 And so is the issue, the parent as the US person or the child as a US person?
Jonah Spiegelman 00:19:40 Well, either way, they both represent different types of problems. So if the child is a US person, any time a US person receives a gift, that's over $100,000 in any given year that must be reported to the IRS.
Jonah Spiegelman 00:19:56 Not because it's a taxable receipt. Right. But if you don't report it, then they can just absolutely hammer you with penalties. It can be, you know, 25% of the value of the gift. And I have had, you know, real files where all of those transactions happened before I was involved. And I've had to do IRS appeals saying, look, you know, under these circumstances, this is not a reasonable penalty to impose. And, you know, I've had some success with that, you know. But to get to a level of review within the IRS where someone has the sense and discretion to, to actually offer relief. It's punishing, you know, time consuming and therefore quite expensive. Now, if the US person is the parent, that's a bit of a different situation because we have this very generous lifetime gift tax allowance. Sometimes all you really need to do is file the gift tax return, because they'll never need the whole 15 million. So really, again, you know, I'm going to sound like a broken record, but everything comes back to the facts.
Nicole Garton 00:21:00 Right. And what about the primary residence exemption? That's something that U.S. persons don't seem to be aware of. Do you want to talk about that?
Jonah Spiegelman 00:21:08 Yeah, that's a really good one. so, as we know, in Canada, the sale of a primary residence is always fully exempt from tax. If you've lived there the whole time you've owned it, that's just, you know, that's become a majority of Canadians’ real savings plan is the home that they live in. so what they don't realize and often this comes up for people who came up from the States a long time ago, before there was a lot of awareness of, of a lot of these issues. The Internal Revenue Code in the US offers $250,000 exempt from capital gains tax, and the rest is taxable. Now, if anyone's lived in Vancouver since the 70s, their gains are a whole lot higher than that. And I've had to break the hard news to clients to say, I'm sorry, you can never sell this home, right? You will own this home until your death, or you will pay, you know, million dollars in US capital gains tax.
Jonah Spiegelman 00:22:01 It can be very punishing. There are sometimes strategies that can be implemented to to relieve that. And, you know, if you've got, you know, one US spouse, one Canadian spouse, you can avoid the capital gains tax on the sale. But, you know, for a single person who's been in their home for decades, it can be a real problem.
Nicole Garton 00:22:24 Yeah. So I've seen clients and beneficiaries that did not know about that. So that's something that I've seen a lot.
Jonah Spiegelman 00:22:32 So it happened to my parents. Oh, when they sold their home. My childhood home. and it didn't occur to them because I was not yet, you know, into this practice area so deeply. No one asked the question. The CPA never asked the question. It was before we had to designate the principal residence on sale. Right. and then from, as a result of their F Barr filings, all this money was suddenly in their reported bank account. The CRA, the IRS said, well, where'd that come from? The story came out and they ended up paying a pretty sizable chunk of tax.
Nicole Garton 00:23:05 That's unfortunate.
Nicole Garton 00:23:09 Let's talk about another minefield about who should be named as executor. So at Heritage Trust. Often we are considered because, you know, the kids have moved to the US. They're either they've got a green card or they've actually become citizens. So what is the real issue if you're Canadian parents that the children moved to the US become US taxpayers? What is the issue in respect of them potentially being executors of their Canadian parent's estate?
Jonah Spiegelman 00:23:42 Right. Well, there's a number of different ones that may or may not be important. Okay. So there's just the practical aspect. If you don't live here, you're not available to do the work of the executor. It's actual work, as you know. And so, you know, as a practical matter, it is better to have someone local who can, you know, be boots on the ground and do the day to day tasks of administering an estate. So that's one thing. Another thing is, of course, if you're a US person and you become executor on a Canadian estate, those are foreign bank accounts that need to be reported on your f bars.
Jonah Spiegelman 00:24:24 and so sometimes, you know, divulging that information is unpleasant and you don't want to do that. Other times you just don't know. And then you're facing penalties for not having done it. So it depends on a level of education. There are more substantive reasons in certain cases that you need a Canadian executor. So if you are a non-resident, being an executor of a Canadian estate, that estate under Canadian tax law may be considered non-resident. And that closes the door to some really important postmortem tax planning. Again, not a not an issue for every estate, but if you've got private corporations or you need to do some postmortem transactions that rely on graduated rate estate status, then then you simply cannot be the executor if you're not resident in Canada. So those are the kinds of circumstances where I strongly advise my clients to have a trust company we know will be resident in Canada. We know that they know what they're doing and can and can take over that job. And oftentimes it's a huge relief, honestly, for the family to know that that stuff's taken care of and it's absolutely worth the cost in certain cases for sure.
Nicole Garton 00:25:39 Let's talk about trusts. So they're regularly used in estate planning in Canada. But when you add a US element the rules can change dramatically. So let's can you talk to us about the main issues in respect of Canadian trusts that may have US beneficiaries and the other cross-border issues that you see?
Jonah Spiegelman 00:25:59 Wow. This could be a whole series of podcasts for sure. So there's a lot there. Starting with the IRS and the US government the tax law generally has a strong aversion to US persons being involved in foreign entities in any kind of way. So whether it's corporations or trusts or other types of entities, there are punitive tax rules that are intended to dissuade Americans from getting involved and hiding their capital offshore is what the mischief was originally. Now, of course, it's a blunt force instrument, and it's not always, you know, what the motivations of the taxpayers were. So there are tax rules. So if you've got a Canadian trust and one of the discretionary beneficiaries happens to live in the US, you can have an accumulating problem.
Jonah Spiegelman 00:26:49 The more you keep the money in the trust. And even though you are a discretionary beneficiary in the US, so you have no actual right to a distribution, the IRS will sort of assume that you have that right. And if you're not receiving those distributions, you have a nefarious purpose. and so there can be some significant tax penalties for future distributions of income that was earned by the trust in a prior year.
Nicole Garton 00:27:15 Does it have to be capital, like a lot of these trusts own shares of private companies or they own they're the beneficial owner of real estate. Like, what about scenarios like that?
Jonah Spiegelman 00:27:28 Right. Well, I mean then you're if you've got private company shares within that trust, you've got problem on problem in ways that are very complicated to untangle because as I said, there's a whole different suite of rules for us persons who own interest in foreign corporations, not only just simple reporting of the facts that have penalties if you don't do it right, but also substantive tax rules that aim to punish, you know, later year distributions of, of previously earned income in that company.
Jonah Spiegelman 00:28:01 And so, you know, it's really important if you have that situation to to get the real facts and analysis on how that's to be treated. There are ways to structure those trusts to avoid those problems. At least, you know currently until it's time to look at succession. But, you know, you can have your hands tied pretty tightly behind your back if you get yourself into a bad structure.
Nicole Garton 00:28:30 So it's important to get advice upfront. Absolutely. What about common estate planning structures like alter ego trusts and joint partner trusts. So, just for the listener, since 2000, if a Canadian is 65 or older, you're allowed to set up this trust which is effectively like a will substitute and you can put your assets into it without triggering tax. And it is a mechanism to avoid probate fees and have privacy and things like that there. It was sort of the sexy thing to advise people to do when they first came out. We don't see them as much anymore, because with the complexity of the regulation and the transparency rules and the tax, people are increasingly declining to use them, but people who still have them.
Nicole Garton 00:29:19 If your beneficiaries are potentially US citizens and are taxpayers, is that a problem for those Canadian structures?
Jonah Spiegelman 00:29:27 Let's see. I mean, I feel like it's not per se a problem. Okay. It's really important if I prepare those sorts of trusts for Canadian only clients who have beneficiaries in the US. Okay. And so what you have to avoid is grabbing a cookie cutter template off the shelf and hoping it works in that context because, while this original settler is alive, there's no problem because the IRS will look right through that trust and pretend you know the Canadian person is the direct owner. And so therefore it's fine when a US person inherits, as long as there's no continuing trust for listeners.
Nicole Garton 00:30:13 The settlor is the person that sets it up. So that's usually the parents.
Jonah Spiegelman 00:30:18 It gets more and more complicated. Certainly if the creators of that trust are also American, it gets more complicated. You can have some real problems if you've got important charitable obligations. The charitable credits don't work well in that structure.
Jonah Spiegelman 00:30:35 You know, if it's a straight up distribution among your kids on death, and there's no particular need for ongoing trusts, it can be useful. As you alluded to, my typical reason for using that type of planning these days is because we strongly anticipate a challenge to the will. And so it's for non-tax reasons. I feel that really drives clients towards that sort of planning these days.
Nicole Garton 00:31:03 That's what I see as well, and that people are increasingly rejecting the expense and administrative layer unless they've got a potential creditor. So maybe we'll say to the listeners, British Columbia is a unique jurisdiction in that we used to have something called the Wales Variation Act, which has been encompassed into section 60 of what's called the Wills, Estates and Succession Act. Do you want to tell our listeners what section 60 is and what the implications are?
Jonah Spiegelman 00:31:30 Sure. So that this is the bane of the estate planner's existence. So typically from, you know, what we learned in law school about testamentary wishes, testamentary freedom is a thing.
Jonah Spiegelman 00:31:43 You can leave your assets to whoever you want. Now, British Columbia's legislature, in their wisdom, decided that it shouldn't be the case that you can just disinherit your spouse or child. It's not to say that you must give them something, but a judge always has the discretion to vary the distributions on petition by child or spouse of the deceased if they think it's just improper. So, you know, you can see how that makes some sense, but it makes it very challenging when a client has actually good reasons for wanting to, you know, prefer one beneficiary over another. And the case law is replete with really crazy fact patterns where, where wills have been varied and you just scratch your head and you I don't know. So it's very difficult to anticipate for a client. Like what the probability of success on one of these applications is. So if it's really important to prefer one beneficiary over the other and you want to make sure of it, you know, a trust is not subject to the Wills Variation Act or now section 60 of the visa.
Jonah Spiegelman 00:32:55 So, that is the most foolproof way.
Nicole Garton 00:32:59 So back to the US planning piece. Is there a bottom line for families considering trust planning when there's a US element? And listening to I'm, I'm anticipating you're going to say it depends but.
Jonah Spiegelman 00:33:13 Well, no. The bottom line…I’ll tell you what the bottom line is. The bottom line is to get some advice from someone who knows what they're talking about on these issues because like I say, most of the time it's not a problem. But sometimes it really can be. And so being able to sort of, from the client's perspective, determine whether or not you have a problem, you can't do it on ChatGPT.
Nicole Garton 00:33:43 Are you seeing clients increasingly coming in with AI materials or?
Jonah Spiegelman 00:33:48 Oh, yeah, absolutely. They do their research before they come in. And oftentimes there's some it's not like everything in there is incorrect, but it's unreliable enough that you'd be foolhardy to leave it at that. And so I think that there is a level of education, the sort of preliminarily that the clients can, can accumulate using those tools.
Jonah Spiegelman 00:34:13 and but the answer is always yes, with, with those tools. And so, you know, I think that if you're going to use those things as a, as a way to set the stage or figure out what we want to talk about, don't close your minds to things you don't know, because those tools do not, they don't have the context and they don't know what questions to ask. and, and, you know, it's really important to seek out those advisors who have experience in this area and can, you know, confidently tell you, you know, do you have a problem or don't you? And that sets the stage for good planning.
Nicole Garton 00:34:57 So back to the minefields. Can we circle back to the registered funds? Like what if we're assuming the parents are U.S. taxpayers, but maybe dual. What are the things they should know about registered funds like roofs and TFSA and things like that?
Jonah Spiegelman 00:35:16 Well, certainly on the RSP and reef side of things, there's not too much uncertainty left.
Jonah Spiegelman 00:35:25 Okay. So the U.S. certainly does not grant a deduction for your contributions. So it is possible for U.S. persons living in Canada to over contribute to their RSP such that their Canadian income tax falls below the US tax. Right. And then you can end up paying some U.S. tax. So if you're a dual citizen, you should have a financial advisor who's aware of this? You should have accountants, clearly, who can do both sides. and, you know, any other team of advisors. So you don't step in that one at least. Both countries will permit the deferral of investment income within that type of plan and fully tax it on the way out. So that stuff is okay. Alright? You know, the TFSA is the classic one. That is I mean, I still feel like there's some uncertainty. One thing that's not uncertain. The US will tax investment income within your TFSA. So it is not tax free on the US side. Again because of the high tax we pay in Canada, it doesn't always mean you're going to have dollars to pay to the IRS.
Jonah Spiegelman 00:36:30 But it's important to know it's not tax free. In the best case scenario, it's just another portfolio account. And I think that there is some movement. I believe there've been some recent cases that came out that have sort of supported that position. I mean, it's been our position for a long time that that's the case. I think we're getting a bit of validation on that. Having said that, I have active IRS appeals where the IRS has imposed penalties as though this TFSA was a foreign grantor, trust is the technical term. And if you don't file the necessary information returns in the US, or more specifically, if you file them late, they're going to penalize first and ask questions later. So it is a bit fraught. Still with the TFSA. And I generally say, look, you know, if we're getting started with planning, US citizens says, “should I have a TFSA or should I not have a TFSA?” I feel like it's not worth the trouble.
Nicole Garton 00:37:32 That's what I understand.
Jonah Spiegelman 00:37:33 That's my take on it. I think that reasonable people can differ on that recommendation, but that's been my view.
Nicole Garton 00:37:41 So one of the themes of your book is that the IRS is watching. So maybe let's summarize so people know what are the key filing and reporting obligations that US citizens in Canada need to be aware of? Like what should they be doing every year?
Jonah Spiegelman 00:37:56 Well, certainly every year filing a 1040 tax return is the basic. And in that return you report your worldwide income regardless of its source. If you've paid Canadian tax, obviously that forms a credit. So you're taking it off the US tax bill. So that's your basic basic. Your other basic basic is the f bars the foreign bank account reports. Most people have more than $10,000 across their Canadian bank accounts because it includes your RSP and your TFSA and everything. So most people are filing FBARs and ten 40s every year. And you know, the penalties for not filing your tax return is specifically have mostly to do a percentage of the tax you have to pay.
Jonah Spiegelman 00:38:43 So in times past that has provided some comfort, I think, for people to say, look, I don't have to pay any US tax. I don't have to file a return. Not true. Because of all the information returns that are increasingly required under US tax compliance. So, you know, there's a whole suite of information returns of $10,000 a year, penalties for not filing it on time. And, you know, those penalties were designed with the absolute worst offenders in mind. And so then what you're left with is having to beg and plead for relief after they hit you with these monstrous penalties. And so that's a challenge. That's a challenge. So, you know, again, going back to the good advice thing, having a CPA that understands all of those information returns and the fact patterns that can give rise to having to file a 54, 71 or 54, seven 3520 there's all of these information returns. It seems like every year there's more. And they're not obvious. You know, a layperson can't really determine whether or not they have to file.
Jonah Spiegelman 00:39:49 And so, you know, good advice is key. Those are the main ones, you know. And then everything else is sort of just it just all flows from the facts. But, you know, if you're involved in Canadian trusts or Canadian corporations or, you know, have investment portfolios, we have to make sure that you have the right products in there and don't have things that give rise to US tax problems. You know, you have to keep your eyes on the prize here. And, you know, make sure that you're getting the right advice.
Nicole Garton 00:40:17 So I don't see this as much anymore. But earlier in my practice, I used to see a lot of what we would call stealth Americans, where, you know, they were born in Chicago in 1945. They've been here for 50 plus years and they've never filed. You know, I understand there was a window of relief for the people like that. That didn't get the memo. Is there something similar to Canada? Like in Canada, we have the voluntary disclosure program.
Nicole Garton 00:40:48 Is there something left in the US where somebody can come forward and file 40 years of returns or.
Jonah Spiegelman 00:40:53 So, 40 years of returns you'll never have to do? Okay. Okay. So there's a number of different streams that you can find yourself flowing down. The best is called the Streamlined Foreign Offshore Compliance Program. And if you match the eligibility criteria for that program, it's basically three years of tax returns, six years of f bars. And if there's any tax to pay, you pay it. Chances are there won't be, as I've said. And then you're deemed compliant. Okay, now you have to have some explanation for why you weren't filing and that it was non willful is the key term, which has a bit of an abstract legal definition that, you know, we could get into if we had more time. If you are more of an “okay, I've known about this the whole time and I've intentionally either underreported or failed to report.” And I can't characterize this as non willful.
Jonah Spiegelman 00:41:58 There are other compliance programs that come with penalties. and my view is those are best suited for people who, you know, really think that they might be going to jail, right. I mean, that's the major carrot they offer on this program. you're not going to jail. but it's like 27% penalties or something. It's like crazy penalties. And so I've never actually had a client who fit that criteria. You know, the other thing to keep in mind too, is like, especially with the fact pattern that you threw out at the beginning of the question. You know, you've been here for 50 plus years. never filed. You didn't think you were American anymore. There's a narrow path to, to potentially argue that you're no longer American under those circumstances. And, that's why, you know, it's important to assess that before you take some recommendation of going ahead and filing the last three years of returns, because you may not actually be American under U.S. law.
Jonah Spiegelman 00:43:13 Right. And so it's important to evaluate that possibility before you sort of accept that you've been non-compliant in your whole life, even though you didn't mean to, and sort of opting back into the system. So, you know, there's, again, different, different strategies for different scenarios for sure.
Nicole Garton 00:43:33 So when is renunciation the right thing to do?
Jonah Spiegelman 00:43:38 Well, I think that renunciation can be very valuable for especially that sort of accidental American who, you know, never really had any connection, certainly no desire to ever live there. and, you know, if they can get out, if they can get through the renunciation without any seriously adverse tax implications, it's a great thing to do. And in fact, just last week, they dropped that renunciation fee back down to the $450 level that it was at for a long time. The last few years, they had more than quadrupled it. So, we just heard that they dropped that feed down, which may actually encourage more people to follow that path.
Jonah Spiegelman 00:44:25 what you don't want to be as a covert expatriate, which is a tax term in the Internal Revenue Code that basically says, you know, if you are a covert expatriate, you have all of these different tax consequences, none of which are good. And so my sort of planning strategy is, okay, we should consider expatriation or renunciation if we can avoid these tax consequences. I really don't want any of my clients to be “covert expatriates,” because that's a label that you can't wash off once you're covert. Expatriate. That's it.
Nicole Garton 00:45:04 So I understand, like migration planning is part of your practice. Do you see a lot of people moving to the US with economic and tax factors and if so, what's involved in that?
Jonah Spiegelman 00:45:19 Yeah, I mean, I do a lot of migration work both northbound and southbound. A lot of times, you know, just the size of the economy gives rise to great opportunities for Canadian talent who want to pursue a job in high tech or banking or whatever it is.
Jonah Spiegelman 00:45:36 Those opportunities are there and there are immigration pathways to get, you know, highly skilled Canadians into that job market. And so it can be quite lucrative. You know, I'll leave the immigration piece aside because you need a valid visa pathway. There's a number of different ones. The most important thing for southbound migrants to understand is that if you are going to terminate your Canadian residency, there's a capital gain tax event that we have to manage. And so it's a dream sale of not quite all, but most of your assets. Certainly anything Canada can't tax after you've left is going to be taxed on the way out the door. And so we need to quantify that exposure. And the Income Tax Act does permit a deferral of the payment of departure tax if you post security acceptable to the minister. And so what does that look like? Do we have some asset we can post as security? Do we need to get a bank letter of credit? These sorts of things. But once you are out of Canada, you're no longer paying Canadian income tax on your worldwide income.
Jonah Spiegelman 00:46:36 I've had clients who moved to the US because they viewed it as a tax shelter. They wanted to pay less tax and so they were willing to trigger the exit tax and, you know, move into a place like Florida or, you know, Washington state that has no state income tax. You pay a lot less tax.
Nicole Garton 00:46:55 What about snowbirds? So what are the rules with that? Like we have a place in Palm Springs. What's the maximum amount of time we're allowed to stay there before there's tax implications?
Jonah Spiegelman 00:47:05 Right. So this is a classic one. And so most snowbirds will not become US tax residents. And under the Internal Revenue Code there's three sorts of triggers for US tax residency: citizenship - clear, green card status - clear (you’re a US person if you have either of those.) The third is substantial presence in the United States. And this is a formula that we run that takes into account the last three years of physical presence in the United States. It's time weighted so that the more recent years are more heavily weighted.
Jonah Spiegelman 00:47:40 The rule of thumb is under no circumstance go more than 182 days in the US in any given year. And if you're averaging more than 120, there's a form you have to file with the IRS every year called the 8840. And that provides an exception to this substantial presence test. And so, you know, 121 days, you're going to want to file on the third year of doing that. So it depends on, you know, how close to the edge you want to cut it. I have clients who for decades have been 175 days a year. Palm Springs file year 8840. Nothing left to do.
Nicole Garton 00:48:17 Okay, so if people are listening, what are the key things you want to leave them with? There's many, many families that are impacted by this. What are the key takeaways you want people to know?
Jonah Spiegelman 00:48:28 Well, I think the key really, I mean, it's going to sound like a broken record. The key takeaway is to get advice from someone who is competent in this area, because oftentimes the uncertainty is a source of stress that people sort of grudgingly live with because they haven't found someone who can unravel the tangled mess.
Jonah Spiegelman 00:48:50 So that's the most important thing. Don't make significant moves without getting that advice, because it's so much easier to plan out a series of transactions that avoids the really nasty consequences rather than trying to, you know, clean it up after the fact. There's something there: sometimes you just can't undo certain things. So, you know, planning ahead, assembling the right team. And that, I mean, that would really be it. I mean, anything else you can you can make it work.
Nicole Garton 00:49:19 How can people find you?
Jonah Spiegelman 00:49:21 So I'm with Polaris Tax Council, PolarisTax.com and my email is Jonah@polaristax.com
Nicole Garton 00:49:28 Thank you so much. It's been great.
Jonah Spiegelman 00:49:30 Yeah. Thanks a lot.
Nicole Garton 00:49:31 This podcast is for informational purposes only and should not be considered individual, legal, financial, or tax advice. Make sure to consult the advisor of your choice to advise you on your own circumstances.
Nicole Garton 00:49:45 Thank you for joining us for this episode of Your Estate Matters. If you like this podcast, make sure to follow it on your podcast platform of choice.
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