Multiple taxation on death: the taxpayer’s nightmare

Steps to limit tax in other jurisdictions

When clients and their assets become more globalized, they may face the possibility of multiple taxation on death.

Most jurisdictions impose some type of death, succession or estate tax. While some countries tax the deceased or the estate, others tax the beneficiary. There are also different bases for charging tax, such as citizenship, domicile, residency and asset location.

Canada and a few other jurisdictions (including Australia, New Zealand and Denmark) tax capital gains on death.

The U.S. has an estate tax but the exemption is now so large (US$11.4 million in 2019) that few pay it. Capital gains are exempted from taxation on death.

While estate tax is charged on the value of a deceased person’s assets when they die, inheritance tax or succession duty—which exists in Japan, Chile, Venezuela and many European countries—is charged on lifetime gifts and bequests that a beneficiary receives. Accession tax is a form of inheritance tax; there’s often an exemption up to a certain amount, above which a beneficiary is taxed on the gifts and bequests they have received during their lifetime.

When tax laws collide, the same assets can be taxed several times. For example, a Canadian resident with a beneficiary living in Japan could have assets taxed twice: Canadian capital gains tax on the Canadian resident’s death and inheritance tax payable on the same assets by the beneficiary who resides in Japan.

It is important to address multiple taxation as part of the will planning process when there are beneficiaries living in countries with an inheritance tax. The client will have to consider whether the beneficiary bears the burden, or whether it is borne by the estate, impacting all beneficiaries—including those who do not live in a jurisdiction with an inheritance tax.

Most Canadian 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 inheritance tax and other taxes levied outside Canada.

However, if the inheritance tax or other tax is disproportionately high, beneficiaries living in Canada could be disgruntled if they end up bearing part of the burden. Inheritance tax can be more than 55% in some jurisdictions.

Planning for multiple taxation

There aren’t many treaties that provide relief for Canadians against double taxation on death. Treaties with the U.S. and France allow certain taxes paid in one country to be credited against tax paid in the other, including U.S. estate tax and French inheritance tax, which can be credited against Canadian capital gains tax paid on the same assets.

There are opportunities in some cases to minimize exposure to multiple taxation by restructuring assets and other planning options. For example, Canadians may be able to shelter assets from U.S. estate tax by using a trust with appropriate terms or a “blocker” corporation, or they may purchase insurance to cover the additional tax.

In France, certain life insurance vehicles can be used to hold investments that are not subject to inheritance tax. In the U.K., trusts can be used to shelter against inheritance tax in some cases for persons not yet domiciled in the U.K.

Without such planning, an estate can be severely diminished. Identifying the issue of potential inheritance tax to be paid by a beneficiary and determining whether the burden should fall on the estate or the beneficiary is a good start.

Each client will have their own philosophy on this issue. Some clients value complete equality, wishing their children to receive the same amount after all taxes and believing that a child should not be penalized for living in a jurisdiction with an inheritance tax. Other clients may take the view that the beneficiary subject to the tax should bear the burden.

With increasingly global families, it will only become more important to understand the perils of multiple taxation on death and to obtain appropriate professional advice to deal with it.

Margaret O’Sullivan is founder of O’Sullivan Estate Lawyers LLP.