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How to protect an inheritance/gift from taxation?
April 23, 2010 6:49 AM   Subscribe

My dad passed away this year and my mom has very generously decided to gift the house to my sister and I rather than. The house is in Canada, I live in the U.S. (Permanent residence). My sister and brother in law bought my half of the house when the mortgage was due (approximately April 1st) so I now suddenly have a 6 digit lump sum of cash in a Canadian account. I have not signed anything yet. I want to protect this from taxation, I also don't want to jeopardize my permanent residence status or potential citizenship. I know I need a lawyer, but what kind and how do I find a good one? I am in Wisconsin, particularly Eau Claire since that's probably important.
posted by substrate to Law & Government (13 answers total)
 
One further note, my sister and brother-in-law and their family have been living in the house with my mom for a few years, hence the reason to buy out my half.
posted by substrate at 6:50 AM on April 23, 2010


Not sure about the tax stuff, but if I were you, I would get this exchanged into USD as soon as possible, now is a great time for it!

I know there is some tax form you can have the "gifter" fill out saying that their lifetime gifts to you will not exceed $1million or something, and then it will be tax free, but I am not sure on the details when it's a property sale type deal. Definitely find a tax lawyer/accountant in your area.
posted by Grither at 6:53 AM on April 23, 2010


Unless you commit a crime a financial transaction won't affect your immigration status.

US citizens are subject to taxation on income generated anywhere worldwide (subject to various tax treaties) but that may not be true of permanent residents.

Speak with a US accountant or tax lawyer first.
posted by dfriedman at 6:57 AM on April 23, 2010


Oh, and obviously consult with a Canadian tax accountant or lawyer about what Canadian taximplications there are.
posted by dfriedman at 6:58 AM on April 23, 2010


And exchanging CDN for USD doesn't necessarily make sense. Both are liquid currencies.
posted by dfriedman at 7:00 AM on April 23, 2010


If you end up leaving all or some of the money ($10k or more) in the Canadian account, you need to be aware of the IRS FBAR filing requirements. Ask your accountant-- you'll need one.
posted by mireille at 7:13 AM on April 23, 2010


I'd look for a US CPA who has knowledge of these sort of cross-border transactions. Cheaper than a tax attorney, most likely, and probably more helpful. If you do get an attorney, you'll need one who specializes in tax.
posted by seventyfour at 7:19 AM on April 23, 2010


You just need to talk to an accountant and a reputable financial advisor (maybe someone at the Royal Bank).
posted by KokuRyu at 7:55 AM on April 23, 2010


My tax prof was very fond of saying "The line between tax avoidance and tax evasion is made of 3' thick concrete."

Handling this improperly, along with an expressed desire to "protect" this income from being taxed, could spell pretty significant criminal penalties. Don't risk hiring a tax accountant who doesn't understand the nuance of the federal tax code's criminal components -- you have six figures sitting in the bank, you can afford a few hours of legal consultation.
posted by toomuchpete at 8:40 AM on April 23, 2010


Well, both Canada and the U.S. support gifts, which this is the intention behind this. I'm interested in finding out the particulars on how to satisfy all rules which seems like it'd be more complicated due to the fact that there are two governments in the mix. I would normally plan ahead but I was blind sided by this. So the general rough consensus seems to be to get a CPA / financial planner which I will do.
posted by substrate at 9:04 AM on April 23, 2010


I'm a lawyer, but I'm not a tax lawyer and I'm not your lawyer. I do encourage you to get a personal tax attorney involved on this. Many tax preparation places should staff someone or know someone, so your best bet might honestly be to talk to H & R Block.

All that said, I believe that the following is true in your case: Estates that do not meet the threshold requirements for the estate tax (yours almost certainly does not) should be inherited tax free. You didn't inherit the money from the sale of the estate, however, so that money is subject to income tax. However, it's almost certainly not regular income tax: I'm pretty sure you're talking about capital gains, in which case you're entitled to a basis. (A "basis" means the original value of the investment vehicle is taken into account - if I buy stock for $10,000 in 2005 and sell it for $15,000 in 2010, I have to pay taxes in 2010 on $5,000, not $15,000.) The basis in your case would be the original value of the house, meaning that the only taxes you owe (if I'm right and I very much stress you should get some help on this) should be on the amount the house appreciated in between the day you received it and the day you sold it.

This analysis overlooks a few things: (a) assuming you owned an interest in the house, you don't get the long-term capital gains tax rate, meaning that even though you're entitled to a basis, your tax-rate will be whatever your bracket's marginal tax rate is instead of the very generous 15% capital gains rate; (b) I have no idea whatsoever how taxation of foreign income works for foreign nationals permanently residing in the U.S.; (c) it seems entirely plausible that the tax code provides for exactly this sort of situation and just says "ah to heck with it, we're not going to tax you on days' worth of appreciation -- proceeds from an inherited property sold within x days or y months or z years is subject to the same tax-exempt status as the inherited property itself." For these reasons and others, check out some lawyers.

Where I would start if I were you: Ask someone at H&R Block or a similar tax preparation service. This is what they do for a living. Also they're quite likely to insure you against auditing. If the people at H&R Block has no clue what to do, I'd call your state's bar association and ask them to put you in contact with tax attorneys in Eau Claire.
posted by thesmophoron at 10:12 AM on April 23, 2010


H&R Block? You have got to be shitting me. That's terrible advice. You need a guy like Gary Gauvin. I have no association, but my co-workers recommend highly for Canada-US taxation issues.
posted by crazycanuck at 9:03 PM on April 23, 2010


Thanks all. Just to summarize what I've learned.

1) There are tax treaties between the U.S. and Canada, these treaties cover gifts.
2) The actual gift isn't taxable by treaty agreement as long as you qualify.
3) If the gift remains in Canada then there are additional filing requirements with the I.R.S. but they aren't too onerous (at this point in time)
posted by substrate at 6:52 AM on May 10, 2010


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