Death Tax and double tax on international estates
By Robert Worthington, Shea Nerland Calnan LLP
High net-worth individuals often have peripatetic lifestyles, being domiciled in one country, with assets in that country and elsewhere, and possibly family members residing in other countries for work, education, or lifestyle reasons. The tax that is imposed on the death of such people can be quite harsh to their estate or heirs. The harsh results are due to differences in the legal and taxation systems with imperfect, or a complete lack of, credit mechanisms or other means to eliminate double taxation. Most major countries have a network of tax treaties to prevent double taxation, but unfortunately most of these treaties only apply income taxes and not the types of taxes exacted on death.
The first issue is that legal systems treat the transmission of a deceased’s property differently. Common law countries (the U.K., U.S., Canada, Australia, and others) have the property pass to an executor or trustee initially, who administers the estate and conveys property to the heirs. The “estate” is often a separate taxpayer. In many civil law countries (continental Europe and several parts of Asia), the property “drops like a rock,” directly to the heirs. The “estate”, then, would not be a taxpayer because that entity or concept is simply non-existent. Taxpayer mismatches can easily lead to double tax problems – or potentially, “double non-taxation” opportunities.
Compounding the issue is that the architecture of death taxes may take three different forms, or variations thereof. The first form is an “estate tax”, levied on the deceased’s estate, often computed as a percentage of the value of the estate (the U.S., South Africa, and parts of Switzerland). The second form is an “inheritance tax”, imposed on the heirs who inherit the deceased’s property (France, Italy, Netherlands, and most of Switzerland). The third form is a tax on accrued capital gains on the deceased’s property (Canada, the relevant taxpayer being the deceased, with the gain being reported in his or her terminal tax return). Another consideration is that different political subdivisions within a country may levy different types of taxes, such as land transfer taxes, VAT, or probate fees.
Moving assets to a friendly jurisdiction is not normally a solution because most countries will impose death taxes on worldwide assets of a person who was resident or domiciled in that country before death. Furthermore, some countries (such as the U.S.) impose a tax on assets situated in that country, even though the deceased taxpayer resided elsewhere.
As mentioned, tax treaties that address death taxes are small in number. Domestic tax laws often have inadequate credit mechanisms as well.
Consider the situation of a Canadian resident with property in the U.S. and heirs in France. Canada would tax the deceased on the accrued capital gain, the U.S. would impose a tax based on the fair market value of U.S. situs assets, and finally France would proceed to tax the beneficiaries. Double or even triple taxation could result. Emigration to a favourable jurisdiction may be an option for some.
If that strategy is pursued, the issues to consider are that the death taxes may follow the migrant for a period of time (Germany), or an exit tax may be charged upon leaving the country (the U.S., Canada). Giving property away to heirs during the person’s lifetime might be worth considering, however most countries that have inheritance tax or estate tax also have a companion gift tax regime to neutralize any advantage.
Other highly-customized planning options may be available. It is important to be proactive, however. As with life insurance, the benefit of such planning is realized the sooner in life it is implemented.
Robert WorthingtonShea Nerland LLP, Calgary, Canada
Robert Worthington is a tax partner at Shea Nerland Calnan LLP Business. His practice includes tax planning for trusts, corporations, and shareholders of private companies, as well as for transactions of a broad spectrum of complexity and size, both domestic and international. He is member of the Society of Trust and Estate Practitioners, Canadian Bar Association, Canadian Tax Foundation, and International Fiscal Association.
Shea Nerland Calnan LLP is a premier tax and business law firm in western Canada based in Calgary. The firm’s lawyers are recognized as highly innovative and at the forefront of complex tax planning opportunities, estate planning, and tax litigation, with broad experience in capital markets, securities, real estate, mergers & acquisitions, business litigation and strategic representation.
Published: October 2015 l Photo: Uwe Rieder