A Canadian resident who was not a U.S. citizen was subject on death to U.S. estate tax on U.S. situs property, namely, US real property and shares of a U.S. public corporation that were not “U.S. real property interests” – and also realized a gain pursuant to ITA s. 70(5). Can the executor claim a credit in Canada respecting the U.S. estate tax paid where:
(i) the value of the deceased’s entire gross estate was equal to, or lower than, U.S. $1.2 million; or
(ii) such value exceeded U.S. $1.2 million?
CRA indicated that in the first scenario, the executor could claim a tax credit in accordance with Art XXIX-B(6)(a)(i) of the Canada-US treaty for the US estate tax paid on the US realty against the Canadian federal tax otherwise payable on the gain from the deemed disposition of the US realty, plus other US-sourced income, as defined under the Treaty. In particular, Art XXIX-B(6)(a)(i) referenced any income, profits or gains arising in the U.S. within the meaning of Article XXIV(3) of the Treaty – and pursuant to the combined operation of Art. XIII and Art. XXIV(3) of the Treaty, the gain arising from the deemed disposition of the US realty under s. 70(5) was deemed to arise in the US. Not so for the gain on the US shares.
Regarding the second scenario, the executor could claim a credit in accordance with Art. XXIX-B(6)(a) for the US estate tax paid against the Canadian federal tax otherwise payable on the gains from the deemed disposition of both the US realty and the US shares, plus other US-sourced income as defined under the Treaty. In particular, Art XXIX-B(6)(a)(ii), which applied in the second scenario, referenced any income, profits or gains of the individual from property situated in the U.S. at the time of death, and the gain from the deemed disposition of the US shares was from such US-situs property given that the postamble to Art. XXIX-B(6) stated that property is situated within the U.S. if it is so treated for U.S. estate tax purposes.