Use of Hybrid Canadian Partnerships in Canadian Estate Planning

By Greg Gartner and Jeanne Posey, Moodys Gartner Tax Law LLP

US estate tax arises on the death of an individual and is applied at graduated rates to the fair-market value of the individual’s taxable estate. The same rates for estate tax apply regardless of whether the individual is a US citizen, US resident, or non-resident of the US. The main difference is that for non-residents, only the value of the US-situs assets is included in calculating the taxable estate.

Ownership of US-situs assets can be through several different forms including personal holdings, a corporate structure, a trust, or a partnership. A key advantage to the use of a partnership is the ability to elect and designate the partnership as a corporation for US tax purposes through the use of a “check-the-box” election. It should be noted, a partnership only exists where partners carry on business in common with a view to profit and the partnership must be a non- US partnership. If the sole use of a partnership is the ownership of personal-use property in the US (not a business) this may limit planning opportunities. However, a partnership, which in addition to owning US real estate owns an investment portfolio, may be viewed as carrying on business to an extent suffcient to permit a partnership to exist.

In terms of estate tax planning, use of the “check-the-box” election is a prudent approach to tax planning as it allows the partnership to be treated as a foreign corporation for US income and transfer-tax purposes while retaining its partnership status (as would be the case in Canada). Where a partnership is treated as a corporation for US purposes, the non-resident individual would be considered to own shares in a non- US corporation at the time of death.

Provided the partnership is not treated as a sham or a nominee, the interest in the foreign partnership would be treated as foreign-situs property, and likely not subject to US estate tax. Further, such election would make the gain from the disposition of any US real property on death subject to US corporate tax which is currently at a rate of 21%.

Greg Gartner

GGI member firm
Moodys Gartner Tax Law LLP
Fiduciary and Estate Planning, Law Firm Services, Tax
Calgary (AB), Edmonton (AB), Canada
T: +1 780 784 2501
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W: moodysgartner.com

Moodys Gartner has one single focus: tax. They provide tax advisory and planning for individuals with personal and business interests on either side of the Canada-US border, no matter where they live in the world.

Greg Gartner, CA, MBA, LLB, QC, is Moodys tax’s director, Canadian Tax Law. Equipped with nearly 30 years of experience, Greg specialises in purchases and sales of businesses, corporate reorganisations, cross-border Canada/ US tax issues, and international taxation.

Jeanne Posey

GGI member firm
Moodys Gartner Tax Law LLP
Fiduciary and Estate Planning, Law Firm Services, Tax
Calgary (AB), Edmonton (AB), Canada
T: +1 780 784 2501
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W: moodysgartner.com

Jeanne Posey, LLB, LLM, began her career as a mortgage broker in British Columbia, and now assists clients with matters related to international tax planning, Revenue Canada, tax-driven corporate reorganisations, and estate and succession planning.

Published: Trust & Estate Planning Newsletter, No. 05, Spring 2020 l Photo: Lisa - stock.adobe.com