The intersection of cross-border taxation and estate planning presents unique challenges for Canadian residents with assets in the United States. Article XXIX B of the United States-Canada tax treaty (“Treaty”) offers a valuable provision that allows Canadian residents to claim a pro rata share of an exemption provided in the U.S. tax code commonly referred to as the Unified Credit.

Very basically, the Unified Credit is an exclusion amount available for U.S. citizens to lower their U.S. gift and estate taxes. In 2024, the Unified Credit is US$13,610,000. After December 31, 2025, however, the Unified Credit will revert to $5,000,000, indexed for inflation, unless Congress enacts legislation to change the amount. The scheduled decrease at the end of 2025 adds complexity to cross-border tax planning landscape.

1.     Article XXIX B of the Treaty: Article XXIX B allows Canadian residents to claim a proportionate share of the Unified Credit against any U.S. estate taxes payable on their U.S.-situs assets. This provision ensures that Canadian residents are not subjected to double taxation on their U.S. assets, providing relief and clarity in estate planning matters. By leveraging Article XXIX B, Canadian residents can minimize estate tax liabilities and preserve a larger portion of their wealth for heirs and beneficiaries.

2.     Maximizing Tax Benefits: If done properly, claiming a pro rata share of the Unified Credit under the Treaty offers significant tax benefits for Canadian residents with U.S. situs assets. The Unified Credit represents a dollar-for-dollar reduction in estate taxes owed, effectively shielding a portion of the estate from U.S. taxation. By maximizing their eligibility for the Unified Credit under Article XXIX B, Canadian residents can optimize tax efficiency and ensure that their heirs receive maximum benefits.

3.     Impact of a lower Unified Credit: The scheduled decrease in the Unified Credit at the end of 2025 adds complexity to estate planning for Canadian residents with U.S. situs assets. U.S. situs assets include U.S. real estate and shares of U.S. corporations (i.e., shares of Microsoft), even if held in a Canadian brokerage account, registered retirement savings plan (RRSP), or tax-free savings account (TFSA). The recent and dramatic appreciation of U.S. technology stocks, combined with a lower Unified Credit threshold, more Canadians may become subject to U.S. estate taxes, potentially leading to increased U.S. tax liabilities. Understanding the implications of a potentially lower Unified Credit and implementing proactive planning measures are essential to mitigate cross-border tax risks effectively.

4.     Navigating the lower Unified Credit: To navigate the future with a much lower Unified Credit, Canadian residents must reassess their estate planning strategies and explore alternative tax planning options. This may include leveraging other tax treaty provisions, such as deductions and exemptions, restructuring estate assets, or implementing trust planning strategies. By adapting to the changing tax landscape, individuals can minimize the impact of the lower unified credit and preserve wealth for future generations.

5.     Seeking Professional Guidance: Given the complexities involved, it's advisable for Canadian residents to seek professional guidance from tax and legal experts experienced in cross-border taxation and estate planning. Bordera Tax and Immigration Law specializes in cross-border tax planning and provides personalized advice to help Canadian families navigate the intricacies of Article XXIX B, and develop customized estate plans tailored to their unique circumstances and objectives.

In conclusion, understanding and leveraging Article XXIX B of the Tax Treaty is essential for Canadian residents with assets in the United States to minimize exposure to the U.S. estate tax and preserve wealth. Additionally, navigating the potentially lower Unified Credit after 2025 requires proactive planning and strategic adaptation. By maximizing tax benefits under Article XXIX B, reassessing estate planning strategies considering a lower Unified Credit, and seeking professional guidance, Canadian families can optimize their tax planning efforts and ensure the preservation of wealth for future generations. With proper knowledge and assistance, Canadian residents can navigate the complexities of cross-border taxation with confidence and achieve their estate planning objectives effectively.