Elaine E. Reynolds
ereynolds@legacylawyers.com
(604) 269-9446 THE UNITED STATES VACATION
HOME
Many Canadians acquire vacation homes in the United States.
Although the home may be rented from time to time, it is used
personally by its owners. If the home is owned through a corporation,
the United States estate tax may be avoided at death but a
shareholder benefit will be assessed currently. Other planning
techniques are as follows:
(1) having a third party loan funds for the acquisition
of the home on a non-recourse basis;
(2) contributing funds to a trust for the benefit of family
members and having the trust acquire the home. The settlor
of the trust should not retain any interest in the trust
either as a trustee or beneficiary. Consideration must be
given to the Canadian 21-year deemed disposition rule and
attribution rules. The trust should be created and funded
outside of the United States;
(3) investing in the home through a hybrid entity (for example,
investing through a limited partnership which elects to
be treated as a corporation for United States tax purposes).
The United States income tax consequences of such a structure
in many circumstances may make this method unattractive;
(4) having one spouse own the United States vacation home
and the other spouse own all the other assets (presumably
non-United States assets) so that the full United States
exemption from the estate tax is available to shelter the
home on the owner spouse’s death. In this case, there
must be will planning in place such that the United States
vacation home is not includable in the taxable estate of
the non-owner spouse if the owner spouse dies first. Further,
will planning should ensure that the assets of the non-owner
spouse are not included in the owner spouse’s taxable
estate if the non-owner spouse dies first;
(5) acquiring only a life estate in the home and having
the next generation of family members acquire the remainder
interest; and
(6) purchasing insurance to fund the liability. The insurance
should be held through an insurance trust to avoid inclusion
in he owner’s taxable estate. Direct ownership of
the policy would result in reduced credit being available
under Treaty Article XXIX B, paragraph 6.
With each of the above planning techniques,
the income tax consequences must be considered on both sides
of the border together with the United States estate, gift,
and generation skipping taxes. Given the complexity, this
type of planning should not be undertaken without adequate
expertise.
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