International Taxation

<p>The estate tax computation base of a nonresident alien&rsquo;s estate consists of his or her taxable estate plus any taxable gifts made during his or her lifetime.<a href="#_ftn1" name="_ftnref1">¹</a> The taxable gifts of a nonresident alien made after 1976 (other than gifts included in the gross estate) also form part of the tax base upon which the estate tax is computed. The adjusted taxable gifts of a nonresident alien are computed in the same manner as for a resident citizen.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Once the taxable estate of the nonresident alien decedent is determined, the mechanics of the actual tax calculation and the applicable rate schedule (before the unified credit) are the same for nonresident alien decedents as for citizen-residents. However, a very important difference comes into play in the use of the unified credit, which is greatly reduced for nonresident alien decedents. This, of course, indirectly results in a higher effective tax rate. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="964">964</a> for a discussion of the unified credit as applied to nonresident aliens.<br /> <br /> <hr align="left" size="1" width="33%"><a href="#_ftnref1" name="_ftn1">1</a><p>.IRC &sect; 2101(c).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.IRC &sect; 2101(b), (c).</p></p><br />

<p>The unified transfer tax credit in the case of a nonresident alien decedent is only $13,000.<a href="#_ftn1" name="_ftnref1">¹</a> This effectively exempts only the first $60,000 of his or her taxable estate from estate tax, a considerably lower threshold than applies to a domestic decedent (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="861">861</a>).<br /> <br /> A special rule applies if the decedent was a nonresident of the United States, but resided in a U.S. possession (e.g., Puerto Rico, Guam) and was a U.S. citizen only because of birth or residence in, or citizenship of, the possession. Under these circumstances, the decedent is considered to be a &ldquo;nonresident noncitizen,&rdquo;<a href="#_ftn2" name="_ftnref2">²</a> and the estate of a decedent in this category qualifies for a credit that is the greater of:<br /> <p style="padding-left: 40px">(1) $13,000, or</p><p style="padding-left: 40px">(2) $46,800 multiplied by the ratio that the value (at death) of that part of the decedent&rsquo;s gross estate that is located in the U.S. bears to the entire value of the decedent&rsquo;s gross estate.<a href="#_ftn3" name="_ftnref3">³</a></p><p><br /> In either case, the credit may not be more than the amount of the estate tax.<a href="#_ftn4" name="_ftnref4">⁴</a> Further, the amount of the available credit is reduced by the value of any lifetime gifts made by the nonresident alien-decedent.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> </p><hr align="left" size="1" width="33%"><a href="#_ftnref1" name="_ftn1">1</a><p>.IRC &sect; 2102(b)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.IRC &sect; 2209.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.IRC &sect; 2102(b)(2).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.IRC &sect; 2102(b)(4).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.IRC &sect; 2102(b)(3)(B).</p></p><br />

<p>The general rule that a U.S. citizen or resident alien is taxed on all worldwide income applies in the case of a sale of real property in the same manner as income from any other source.<a href="#_ftn1" name="_ftnref1">¹</a> Therefore, a U.S. citizen or resident alien who sells real property that is located in a foreign country must report and abide by U.S. tax rules relating to the sale of real property (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7845">7845</a>).<br /> <br /> Thus, for example, a U.S. citizen who sells a principal residence that he or she has used as a principal residence for two of the five preceding tax years is entitled to exclude a portion of the gain from taxation in the U.S. in the same manner as though the property was located within the U.S. (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7845">7845</a>).<br /> <br /> Though the U.S. citizen or resident alien may also be required to pay taxes upon disposition of foreign-located real property both in the U.S. and in the country in which the property is situated, he or she will be entitled to claim a credit for certain foreign taxes paid on his or her U.S. tax return.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Further, a U.S. citizen or resident alien may be entitled to deduct any real property taxes that are imposed by a foreign country on his or her U.S. tax return.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <hr align="left" size="1" width="33%"><a href="#_ftnref1" name="_ftn1">1</a><p>.See IRS Publication 544.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.See IRS Publication 54.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.IRS Pub. 54.</p></p><br />

<p>Mexican law prohibits the direct ownership of real estate within what is designated as the &ldquo;restricted zone,&rdquo; which is defined to include &ldquo;all land located within 100 kilometers (about 62 miles) of any Mexican border, and within 50 kilometers (about 31 miles) of any Mexican coastline.&rdquo;<br /> <br /> In order for a U.S. individual to acquire property within the restricted zone, the buyer must first form a &ldquo;fideicomiso&rdquo;<a href="#_ftn1" name="_ftnref1">¹</a> with the buyer&rsquo;s bank serving as the title owner of the real estate, and as the trustee to the trust, with the U.S. buyer being the trust beneficiary.<a href="#_ftn2" name="_ftnref2">²</a> This structure allows the U.S. buyer to enjoy complete and unrestricted use of the real estate.<br /> <br /> Essentially, the seller of the property sells the parcel to the bank as the trustee of the fideicomiso. The bank has a fiduciary obligation to follow instructions provided by the U.S. trust beneficiary, who will retain all ownership rights, while the bank retains title. Under this arrangement, the U.S. person can sell the property that is held in trust at its market value to any ready, willing and able buyer. In addition, the buyer can instruct the bank to lease the property to any person at terms favorable to the beneficiary.<br /> <br /> <hr align="left" size="1" width="33%"><a href="#_ftnref1" name="_ftn1">1</a><p>.In essence, a Mexican trust that will hold real estate.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.In addition, the bank as trustee is also required to apply to the Ministerio P&uacute;blico (Minister of Public Affairs) for permit to acquire real estate and to establish the trust.</p></p><br />

<p>If an individual is not considered a resident of Canada by fact, or is not deemed to be a resident of Canada by statute, then the individual will be considered a non-resident. Non-residents are not taxed on their worldwide income, but rather only on income that is derived from a source in Canada. This would include, for example, business or employment income in Canada or monies generated from a disposition of taxable Canadian property. A non-resident is also subject to Part XIII withholding tax on income earned from property held in Canada, otherwise known as &ldquo;passive&rdquo; income. Examples of passive income include the payment of dividends, royalties or interest.<br /> <br /> U.S. citizens who are non-residents of Canada but have Canadian source income must file a T1-NR Individual Tax Return with the CRA.<a href="#_ftn1" name="_ftnref1">¹</a> U.S. residents who are non-residents of Canada and earn only passive income need not file a Canadian tax return. Instead, a withholding tax is withheld by the payor and remitted directly to the CRA on behalf of the non-resident. This requirement imposed on payers of monies going to non-residents simplifies the CRA tax collection efforts as against non-residents.<br /> <br /> <hr align="left" size="1" width="33%"><a href="#_ftnref1" name="_ftn1">1</a><p>. <a href="https://www.canada.ca/en/revenue-agency/services/forms-publications/tax-packages-years/general-income-tax-benefit-package/non-residents.html">https://www.canada.ca/en/revenue-agency/services/forms-publications/tax-packages-years/general-income-tax-benefit-package/non-residents.html</a> (2022 Income Tax and Benefit Package (for non-residents and deemed residents of Canada)).</p></p><br />

<p>Yes, there is tax payable on income from property, but a U.S. citizen who is not a resident of Canada is not required to file a Canadian tax return if their only income from Canada is from certain types of &ldquo;passive income.&rdquo; Common examples of Canadian &ldquo;passive&rdquo; income include:<br /> <p style="padding-left: 40px">(i) royalties;</p><p style="padding-left: 40px">(ii) interest;</p><p style="padding-left: 40px">(iii) dividends;</p><p style="padding-left: 40px">(iv) rental income; and</p><p style="padding-left: 40px">(v) pension income.</p><p><br /> When royalties or interest, for example, are owed to a U.S. citizen who is not resident of Canada, the payer withholds tax at the time of payment to the non- resident. Thus, the U.S. citizen receives the balance of the funds owed. The general rate of withholding tax is 25 percent, but this may be reduced to a lower rate pursuant to the Canada- U.S. Tax Treaty. Given that the U.S. citizen must also report this income on their U.S. income tax return, there may be relief from double taxation under the Canada- U.S. Tax Treaty and the foreign tax credits available in the U.S. to offset the Canadian taxes paid. The payer of rental income earned by a non- resident must also withhold 25 percent of the gross rents received and remit that payment to the CRA, although there may be an option to reduce the withholding tax by calculating the amount relative to net income earned from the property in the case of real property rentals.</p></p><br />

<p>Canadian resident taxpayers will be subject to tax on half of the realized capital gains arising from the disposition of Canadian real property (assuming the property is held on capital account as opposed to on income account). That is, only half of the realized capital gains will be subject to tax at the individual&rsquo;s marginal rate.<a href="#_ftn1" name="_ftnref1">¹</a> If a loss is realized, then such losses are deductible, but only as against other capital gains.<br /> <br /> <hr align="left" size="1" width="33%"><a href="#_ftnref1" name="_ftn1">1</a><p>. CRA: Calculating your capital gain or loss, http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/rprtng-ncm/lns101-170/127/gns/clclt/menu-eng.html.</p></p><br />

<p>Canada does not have estate taxes. However, the provinces in Canada levy probate taxes. Canadian probate taxes are narrower in application than U.S. estate tax.<a href="#_ftn1" name="_ftnref1">¹</a> For example, Ontario probate taxes will apply on assets that are the subject of a will probated in Ontario, but will not apply to real property situated outside Ontario.<br /> <br /> U.S. Individuals residing in Canada will need to consider both U.S. and Canadian tax in their estate planning.<br /> <br /> Special care needs to be taken in developing succession plans for U.S. citizens resident in Canada due to the potential for mismatch in tax treatment of individuals in Canada versus the U.S. As these individuals are potentially subject to both the ITA and Internal Revenue Code, care must be taken to ensure that any estate plan is advantageous under both. There are many traps that can catch taxpayers dealing with both systems. Seeking professional advice from cross-border proficient advisors is well advised if you are a U.S. citizen who lives in Canada or who has assets situated in Canada.<br /> <br /> <hr align="left" size="1" width="33%"><a href="#_ftnref1" name="_ftn1">1</a><p>.See https://www.attorneygeneral.jus.gov.on.ca/english/estates/calculate.php for how to calculate Ontario rates.</p></p><br />

<p>U.S. citizens living in Canada have many considerations that should be taken into account, only some of which are discussed here. In addition to the filing requirements already outlined above, U.S. citizens should be aware of the Net Investment Income Tax, or &ldquo;Medicare Tax&rdquo; as it has become colloquially known. U.S. citizens who historically have not had any U.S. income tax liability may be subject to this new tax at a rate of 3.8 percent if they have &lsquo;net investment income&rsquo; (generally investment income such as interest, dividends, capital gains, etc. less permitted expenses related to that income such as brokerage fees and interest expenses) and they have a modified adjusted gross income over $200,000 if single, or $250,000 and filing jointly, Unfortunately for U.S. citizens subject to this tax, it seems unlikely that foreign tax credits can be used to reduce or eliminate this tax liability as the net investment income tax is not imposed by Chapter 1 of the U.S. Code and foreign tax credits are only applied as against Chapter 1 taxes.</p><br />

<p>Generally, yes, though there are certain conditions and restrictions that must be understood first. U.S. individuals and other non-Mexican individuals may directly own real estate in Mexico. However, U.S. individuals may <em>not</em> directly own any real estate parcels within an area designated as the &ldquo;restricted zone&rdquo; (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="1002">1002</a>).<br /> <br /> From a very practical position, any U.S. individual seeking to purchase real property in Mexico should understand the following basic premises<br /> <p style="padding-left: 40px">(1) The real estate industry in Mexico is generally unregulated. Real estate agents and brokers are neither licensed nor regulated as they are in the U.S. In addition, there is no &ldquo;Office of the Real Estate Commissioner&rdquo; or equivalent in Mexico to provide any type of consumer protection or advocacy. In any Mexican real property transaction, extreme caution must be exercised before executing any contract.</p><p style="padding-left: 40px">(2) Any acquisitions in the &ldquo;restricted zone&rdquo; by a U.S. individual must be undertaken with the following entities:</p><p style="padding-left: 80px">o A bank;</p><p style="padding-left: 80px">o A public notary; or</p><p style="padding-left: 80px">o The buyer&rsquo;s attorney (preferably a licensed Mexican attorney).</p></p><br />