The growing problem with Canadians owning U.S. property
The recent extension of the Bush area tax cuts seems to have solved or at least provided some much need clarity to Canadians owning U.S. property (the original problem with Canadians and U.S. estate tax summarized by Canadian Capitalist). The quick and dirty being starting in 2011, the basic exemption on the estate tax will be $5 million with the top marginal tax rate at 35% (both the exemption and tax rate being much lower than if the tax cut had not been extended).
(Canadians can rely only upon a portion of the U.S. estate tax exemption as illustrated here; the tax rates listed are dated but the analysis continues to be correct).
However, what Uncle Sam giveth with one hand it taketh with the other. Under the Small Business Jobs Act 2010, owners of real estate purchasing more than $600 worth of goods and services will be required to provide a Form 1099-MISC (which is like a T4A in Canada). The issue is not providing the form per se. The issue is that a Canadian will need to apply for a Taxpayer Identification Number to file the form which means it will be classified as a “non-resident alien” (in simple terms, a non-resident alien is not a U.S. citizen but has submitted to its taxing jurisdiction).
The most likely result is: (i) administrative burden of keeping paperwork; (ii) more professional fees in retaining accountants to file tax returns; and (iii) possible audit risk from the IRS (as a non-resident alien taxpayer, there is no one in Congress who wants to intervene on your behalf given the taxpayer is not a voter).
The second issue is an ongoing one. The exemption from the U.S. estate tax is calculated on the market value of the property of the deceased whereas in Canada only the gain on the deemed disposition at death is taxed; to phrase this another way, the Canadians tax you for being a shrewd investor; the American tax you for merely holding it. This is a crucial difference that most Canadians who do not have experience with American tax law do not initially grasp.
All of this is to say that Canadians holding U.S. assets (including stock listed on U.S. exchanges) are increasingly being caught in a jurisdiction badly in need of tax revenue and widening their scope to collect it. Professional advice is required for any Canadian in this situation.