With increasing globalization of people and their assets, a growing and often hidden threat is multiple taxation on death. Different countries tax in different ways on death, and when those laws collide, the same assets can be exposed to double and even triple tax or more.
Some countries tax the deceased or the estate on death, and some tax the beneficiary. There are also different bases for charging tax, such as citizenship, domicile, residency or the location of the assets.
Most jurisdictions impose some type of death, succession or estate tax. Canada, and a few other jurisdictions (including Australia, New Zealand, and Denmark) are unique in taxing capital gains on death. And there is growing talk in the U.S. of replacing its estate tax with a capital gains regime on death similar to Canada’s.
It will be of increasing importance to understand how foreign taxes impact your estate plan. For example, what if your child or other beneficiary of your estate is subject to paying inheritance tax on the value of his or her inheritance because he or she lives in a country that has an inheritance tax? Countries that impose an inheritance tax include Croatia, Czech Republic, Finland, France, Germany, Greece, Hungary, Ireland, Japan, Kora, Luxemburg, Netherlands, Norway, Poland Serbia, Spain, Switzerland (some cantons), and Venezuela.
If you are a Canadian resident, your assets could be exposed to paying tax twice: Canadian capital gains tax on your death and inheritance tax by your beneficiary.
Most wills contain a “debts and death taxes” provision that provides for all death taxes to be paid by the estate so the beneficiaries receive the same net amount notwithstanding local taxation. In particular, where inheritance tax is at a high rate, this may produce an unintended result and give rise to disgruntled beneficiaries who are not subject to inheritance tax. It is important to address this issue as part of the will planning process, in particular where there are existing beneficiaries resident in a country with an inheritance tax. Should the beneficiary bear the burden, or the estate and thereby indirectly all of the beneficiaries?
In Canada, we have some relief against double taxation on death but only with two countries, the U.S. and France where there are treaties in effect to provide relief on death by allowing taxes paid in one country to be credited against tax paid in the other.
In the European Union, the issue of multiple taxation on death is recognized as urgent – progress is being made to address the problem and adopt a solution such as a one tax system on death based on a deceased’s habitual residence, “one succession – one tax” as advocated in a recent EU expert report, but there is a long way to go.
As with many legal and tax issues affecting estate planning for global families and any person with ties to another country, there is distinct disharmony – not harmony, which creates challenges and potential minefields. Multiple taxation on death is one – and the first step is awareness and identification of the issue with professional assistance, and then dealing with it.
-Margaret O’Sullivan
The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. In particular, they are not intended to provide U.S. legal or tax advice. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.