Gift Tax

Note: reference to dollars is in U.S. currency and state gift tax will not be addressed

The December 2017 Tax Cuts and Jobs Act doubled the lifetime gift tax/estate tax exclusion to $11.18M effective for 2018 to 2025, subject to inflation adjustments for subsequent years. The unified tax credit relating to the 2018 exclusion is $4,417,800. For 2019, the exclusion amount is expected to be $11.4M with an unified credit of $4,505,800. The increase after 2025 may or may not be approved by Congress to be of a permanent nature. If it is not approved, the thresholds will revert to the pre-existing inflation-adjusted amount.

General information

The U.S. federal gift and estate tax rules are an integrated system for U.S. citizens and those domiciled in the United States.

Gifts made by Canadian donors of a present interest in U.S. situs tangible property (real and personal) such as one’ s vacation property situated in Florida is subject to the gift tax based on the above tax rates. In most cases, gifts made by Canadians of intangible property such as shares of a U.S. corporation are not subject to gift tax except where the U.S. expatriation rules may apply. If you gave up U.S. citizenship or your green card as being classified a long-term resident (“LTR”) of the U.S., you need to reveiw these rules. Exemptions available to Canadians are significantly lower than what is available to a U.S. citizen or a U.S. domicile.

The Canada\U.S. tax treaty does not provide relief for federal/state gift tax.

Incidence of gift tax

Taxable gifts made during one’s lifetime are subject to the same graduated tax rates as estate tax. The 2018, $11.18M (2019-$11.4M) lifetime gift tax exclusion/estate tax exclusion is available to U.S. citizens, U.S. domiciliaries and green card holders. Post 1976 taxable gifts are included in the gross estate and credit is given for gift tax previously paid.

For  years 2015 to 2017,  the first $14,000 of gifts of a present interest annually made by a donor to each donee, are not included as taxable gifts. For 2018, this annual exclusion rises to $15,000. If  the  gift is above the annual exclusion, then one has to compute the gift tax (using the estate/gift tax rate table), however as the unified credit is for both the  incidence of estate and gift tax,  the present $11.18M (2018) lifetime exclusion may apply. The maximum rate is  40% ( that is in accordance with The American Taxpayer Relief Act of January 1, 2013).

Although for U.S. purposes, this lifetime exclusion say to gift significant amounts is very attractive, at least to 2025, for those U.S. citizens  that reside in Canada, the gifting of appreciable assets will create immediate  taxation here  if the transfer is generally not to their spouse. One  should review this situation before any transfer is contemplated if the U.S. citizen is not residing in the United States, to avoid  potential tax exposure in their country  of residence. The Tax Treaty should be examined for any relief.

The determination of the effective tax on taxable gifts made in the current year depends on the taxable gifts made in prior years which could result in a higher effective tax rate on current years’ taxable gifts.

With certain exceptions, an unlimited amount of gifts may be made between spouses who are U.S. citizens. With restrictions, an unlimited amount of gifts for a donee’s medical and tuition expenses is also available. Gifts to minors in accordance with IRS Code 2503(c) are included in the computation of the annual gift exclusion. A gift tax charitable deduction is also available for gifts to charity.

For 2018, annual gifts of $152,000 made by a U.S. citizen to his/her non-U.S. citizen spouse are not taxable. For 2019, the threshold  is expected to be $155,000. This area requires review where spouses are separated and U.S. real property may be transferred to one spouse as a result of settlement. Where the recipient spouse is not a U.S. person, the U.S. non-recognition rule pertaining to the gain will not apply. It is possible that some of the settlement still may be a gift if fair market value is not paid to the tranferor spouse so careful planning is necessary as the Canadian rules for a spousal transfer needs to be examined as well to ensure there is no double taxation. IRS Form 8288-B for a withholding certificate to reduce the FIRPTA withholding will be beneficial where the effective tax on the capital gain is less than the 10%/15% withholding on the gross sale or transfer price.

Canadians are not eligible to utilize the $5.49M (2017) lifetime gift tax exclusion available to U.S. citizens, U.S. domiciliaries and green card holders.

Care should be taken in making non-taxable gifts of appreciated property to spouses and minors as the property transfer and attribution rules in the Canadian Income Tax Act may be costly.

Carryover basis

Generally speaking, the donee obtains a basis in gifted property equivalent to the adjusted basis to the donor plus an adjustment for gift tax paid on gift on gifts made after 1976.

Filing gift tax returns

The due date for IRS Form 709 is April 15th, of the year after the gift was made.

You are not required to file Form 709 if (i) you made no gifts during the year to your spouse; (ii) you did not give more than $15,000 (2018) to any one donee, and (iii) all the gifts you made were of present interests.

Contact your professional advisor prior to implementing any of the outlined strategies.

Internal Revenue Service Circular 230 Disclosure

Pursuant to Internal Revenue Service Circular 230, we hereby inform you that the advice or information set forth herein with respect to U.S. federal tax issues was not intended or written to be used, and cannot be used, by you or any taxpayer, for the purpose of avoiding any penalties that may be imposed on you or any other person under the Internal Revenue Code.