U.S. citizens, are subject to U.S. estate tax on the fair market value of their worldwide assets on death. For 2016, the U.S. estate tax applies on the value of taxable estates in excess of U.S. $5,900,000 at a rate of 40%.

It is also known that Canadians with U.S. vacation properties, commercial real estate and, in some cases, business interests may be subject to U.S. estate tax based on the fair market value of the properties at the date of death.

Canadians are also subject to Canadian income tax on the capital gains on their assets, at time of death. There may be some credit against the Canadian income tax for the U.S. estate tax. Given that the estate tax rate is approx.15 % higher than the Canadian capital gains tax rate and is charged on the value of the estate, not just on the gains, the reality is a 40% tax on the value of U.S. based assets for Canadians.

If you think, you don’t own any US assets just because you don’t own U.S. real estate, here is a surprise, U.S. securities held in a Canadian brokerage account or registered plan are considered to be U.S. property for U.S. estate tax purposes.

Canadians who have absolutely no links to the U.S. “either by citizenship, domicile, Green-card status or owning property located in the U.S.” can end up with a significant unexpected tax bill just because their Canadian investment portfolio includes U.S. securities.

As noted above, with U.S. estate tax as high as 40% on the full fair market value of the U.S. assets, it is much higher than the Canadian tax of approximately 26% on the capital gain “not fair market value”.

There are exemptions from U.S. estate tax, essentially for Canadians whose worldwide assets “not just U.S. assets” do not exceed U.S.$5.9 million of value for 2016. Even though this amount is indexed to inflation, when you factor in the home, a vacation property, the family business and investments that have accumulated over the years, it is not uncommon for Canadians to exceed this limit.

If the fair market value of U.S. securities is say, US$1,000,000 and the Canadian’s total assets including these securities is US$6,900,000 US the potential U.S. estate tax would be U.S. $400,000 in 2016.

There are ways for Canadians who are not a U.S. citizen, Greencard holder or domiciled in the U.S. to avoid this unexpected U.S. tax surprise. Owning the assets through a trust may help but is quite complicated.

A simpler solution is to transfer the offending securities, tax free, to a Canadian corporation. The shares of the Canadian company are not U.S. property even though the company’s investments are.

The corporation doesn’t die when the shareholder does. However, one must also consider the tax consequences of owning the investments in a Canadian corporation. There is a potential for double taxation in Canada. With proper estate planning, however, this exposure can be minimized.