Advisors need to stay on top of clients’ evolving family circumstances to ensure their estate plans take the potential tax implications of having an executor or beneficiary based in another country into consideration.courtneyk/iStockPhoto / Getty Images
Canadian families have become increasingly global as more people pursue careers and raise a family outside of the country. The pandemic-driven shift to remote work could also lead more Canadians to consider moving to different locales, adding complexity to estate plans for parents and their beneficiaries.
Advisors need to stay on top of clients’ evolving family circumstances to ensure their estate plans take the potential tax implications of having an executor or beneficiary based in another country into consideration.
“It’s something that needs to be disclosed as early as possible ... so that there are no surprises later on,” says Ian Calvert, vice-president and principal, wealth planning, at Oakville, Ont.-based HighView Financial Group.
Although many countries have tax treaties with Canada to avoid double taxation at an income tax level, some treaties – such as the one between Canada and Britain, for example – don’t address inheritance or estate taxes, says Krista Kerr, chief executive officer at Toronto-based Kerr Financial Group, a fee-only wealth-management firm.
“So without understanding that, you could have a double-tax situation if you’re not careful or don’t receive the right advice,” Ms. Kerr says.
Dealing with non-resident executors
The main issue with having an out-of-country executor is that the Canada Revenue Agency could consider the estate to be a non-resident of Canada, which could trigger negative tax consequences, such as loss of preferential capital gains and dividend tax treatments.
For example, if a child lives in the U.S. or Britain, the estate could be considered domiciled in one of those countries, which have different tax rates and laws.
Canadians can avoid this issue by naming an executor in Canada either instead of or alongside someone living in another country, Mr. Calvert says. For example, someone with two children, both of who live in other countries, may wish to hire a Canadian corporate trustee as their executor.
“That will simplify things, but that work doesn’t come for free,” he says, noting that corporate trustees charge a relatively high fee. The rate varies but is roughly 5 per cent of assets that pass through the estate.
It’s a cost Mr. Calvert says advisors should discuss with clients when determining not only who to appoint as an executor or executors, but also when deciding how to distribute their estate.
Ms. Kerr says parents can ask their Canadian executor to consult with their children either through a request in a letter of wishes outside of the will (known as a testamentary letter) or through a non-legally binding wish in the will to help ensure their wishes are met.
“The key is that either of these is not legally binding but is instructive to the executor,” she adds.
If an executor is in another country, such as the U.S., Ms. Kerr says the estate may be required to post a financial bond, which protects the estate’s creditors and beneficiaries in the event that the assets of the estate are administered improperly.
How to treat non-resident beneficiaries
There can also be tax implications for non-resident beneficiaries of a Canadian estate, such as withholding tax on certain types of payments. Another issue that can arise for beneficiaries outside of Canada is the characterization of assets, such as stocks or property, and whether it can be done tax-free.
Some countries also have an inheritance tax, but the thresholds vary depending on the location. For example, in the U.S., only estates valued at US$11.7-million or more are subject to federal estate taxes. (However, the Democrats’ latest tax plan proposes to lower this threshold to about US$6-million starting Jan. 1, 2022, sooner than the currently scheduled reductions starting in 2026.) In Britain, the standard Inheritance tax rate is 40 per cent on the first £325,000 of an estate, with some caveats.
“It really depends on the country where the beneficiary lives,” says Steven Flynn, a partner at accounting firm Andersen LLP in Vancouver, who specializes in cross-border tax issues.
Some countries also require reporting of the inheritance, such as with the Internal Revenue Service in the U.S., even if there is no tax on the inheritance.
Mr. Flynn says the big issue for parents today is how to leave money to their grandchildren, who may have been born and raised in a foreign country.
“It’s about looking at the next generation and saying, ‘What can we do to plan for that?’”
For some families, trusts are a good way to distribute assets from the estate, Mr. Flynn says. The family can set up a Canadian-based trust and then distribute the assets, or they can opt for a trust in the foreign country, such as the U.S., to distribute funds to beneficiaries in that jurisdiction.
Each scenario for non-resident beneficiaries of an estate will be different, and Mr. Flynn says advisors should work with experts to ensure they’ll help clients make the best decisions for themselves and their beneficiaries.
The time to plan is now
He also recommends advisors have these estate planning conversations sooner rather than later to avoid negative tax consequences, where possible, and to ensure clients that their estate is distributed the way they want.
“It just goes a long way to making sure when they pass away, that their wishes are fulfilled, and there are no surprises,” Mr. Flynn says.
Advisors also need to stay on top of changing tax rules in Canada and globally, adds Ms. Kerr, who also recommends seeking advice from cross-border tax and legal experts in foreign jurisdictions, as needed.
“I find that the more I deal with these situations, the more I like to get advice … because things change,” she says. “And the more you peel back the layers, the more complexity there is.”