When it comes to US-Canada cross-border tax planning, a suggested rule of thumb is “to plan as if the US spouse is the spender and the Canadian spouse is the one saving assets,” said Christine Perry, lawyer at Keel Cotrelle LLP, during the second half of a seminar at the CFA Society Toronto offices on October 29, 2013.

Perry identified eight common issues in cross-border tax planning that she encounters. Her list began with wills that are drafted in contemplation of “only” Canadian law, “which I see two or three times a month,” and moved on to issues involving gifts, insurance, and prescribed-rate loans (that are less easy to summarize in a posting).

As an alternative to an outright bequest, a testamentary trust can be set up for a US spouse, or US children or grandchildren. Perry described key features, especially regarding the power of appointment, and how to retain flexibility for beneficiaries.

Canadians with “US situs assets” such as a condo in Florida may have to pay US estate tax. For planning, “we need to look at the spread between Canadian capital gains tax and the US estate tax rate,” said Perry. She gave a worked example of a pro-rated credit calculation based on the value of the US situs assets, the worldwide assets, and the unified credit.

The US situs asset rules differ between “gift” and “estate” calculations, with the estate definition being much broader and including stock and debt obligations. Perry also went through an example set-up for an estate for which she calculated the treaty credit and the tax liability.

Planning for common US situs assets is a broad area, and time constraints meant Perry kept her comments to residential real estate. There are a half-dozen methods of ownership: individual, tenancy in common, joint with right of survivorship, partnership, corporation, and irrevocable trust. These are included in the estate tax calculation in different ways, and have differing efficiencies when it comes to income tax efficiency. “In the flurry of estate tax, we must not forget about income tax,” she reminded attendees.

As far as planning options go, restructuring can be significant—anything from outright fair market value sale (openly, or to the children) to refinancing with a non-recourse mortgage loan.

Perry gave highlights on tax information reporting: TD F 90-22.1 (a.k.a. the “F bar”), and Forms 8938, 5471, 8621, 3520, 709. These highlights were brief enough not to discourage the non-specialists in attendance, but relevant enough to be useful to the specialists.

In the same vein, Perry’s survey of “problematic investments and structures” gave useful and succinct highlights of some typical Canadian tax vehicles such as the Registered Education Savings Plan (RESP) and Tax-Free Savings Account (TFSA) applied to the case of US persons resident in Canada. She surveyed the definitions of a closely held company, mutual funds, family trust, offshore disclosure, and expatriation.

Last but not least Perry provided context for the Foreign Account Tax Compliance Act (FATCA) that is coming into effect in 2014. “I’m encouraging everyone to become compliant during the period of leniency” as the law is coming into effect, said Perry. Designed to combat offshore tax evasion, FATCA means there will be an increase in involuntary disclosure due to new requirements of third-party reporting. The IRS will be cross-referencing information between self-disclosed and third-party numbers.

To apply this new law, it will be necessary to ensure that foreign jurisdictions climb aboard. The Model 1 type of intergovernmental agreement (IGA) must be signed. So far, nations such as Mexico, the UK, and Germany have signed. Perry said that “Model 1 IGA discussions are underway for Canada” along with many other nations (see Thomson Reuters map of FATCA IGA).

Perry urged a thorough due diligence on all individual accounts, emphasizing that both paper and electronic searches—as well as queries with the relationship manager—should be required for accounts of over $1 million. For the lower value accounts,  electronic record searches for “US indicia” such as “current US telephone number” are required to be made.

As globalization extends and more households become “cross-border families” the tax issues will deepen. In closing, Perry urged attendees to know their clients, to keep it simple as simple as possible for their arrangements. “Encourage your client to get US advice and report.” ª

Click here to go to Part 1. ª

Circular 230 Disclosure. Pursuant to US Treasury Department regulations, any federal tax advice contained in this written communication is not intended or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.