Deducting mutual fund investment counsel fees

How tax results can hinge on how fees are paid

There is a longstanding debate whether an investor is better off paying through a mutual fund’s management expense ratio (MER), or by direct fee to an advisor in a fee-based account.

The direct fee is favoured by some advisors and investors as it is more transparent than MERs, and can show the total fees on a portfolio in one place. In turn, the investor can clearly see the after-tax cost of such fees when claiming the deduction on his or her annual income tax return.

Still, the question remains whether a direct fee allows for a larger tax deduction, is neutral, or may be more costly in some cases – all issues being addressed in this bulletin.

Criteria for deductibility

As a tax principle, deductibility generally requires that a particular outlay is related to earning taxable income. The further removed from that core purpose, the less likely the outlay is to qualify.

For investment counsel fees, the financial advisor must be advising on the buying or selling of individual shares or securities, or pooled securities like mutual funds. This may include administration or management services related to those securities. Such advice or services must be the advisor’s principal business.

Non-registered accounts

Comparison using fully taxable income

To illustrate the tax effect, we’ll keep the advisor’s advice and compensation the same, whether payment is by MER or direct fee (“Fee”). Either way, the total cost to the investor will be 2% of the assets under management.

Our investor has $10,000 to place in either an A-series mutual fund with a 2% MER, or a 1% F-series version that leaves room for the advisor to charge a direct fee of 1%. To simplify the arithmetic, we’ll assume our investor is at a 50% marginal tax rate, and that the fund’s only income for the year is a 5% interest return.

In both columns, the MER reduces the initial investment return, thereby reducing the amount of income available for distribution to the investor. Once the direct fee is charged by the advisor to the investor at the second step as shown in the right column, the investor is left with the same taxable income and net income under either method.

As illustrated, there is no difference when the amount of fully taxable income – interest and foreign dividends – is at least as much as the MER of the A-series mutual fund.

Preferred income distributions

Of course, not all investment income is fully taxable. Canadian dividends benefit from the gross-up and tax credit procedure. Capital gains are not taxed until realized, with a 1/2 income inclusion for individuals on the first $250,000 of gains in a year, and a 2/3 inclusion thereafter. (The 1/2 rate is used in the examples in this article.) If the fund has preferred income, does this lead to a preference for either MER or direct fee? The answer is “no”.

A mutual fund is subject to very high tax rates, near or beyond 50% depending on the province where it is headquartered. It would be costly for investors as a whole – and particularly for those below top bracket – if the mutual fund was to pay income tax, especially if applied against preferred income. Accordingly, once MERs are applied against income, a mutual fund will always distribute any remaining income to investors.

Under either method/column in Example 1, this will be an additional distribution of the same amount of preferred income to the investor. Whatever the investor’s tax bracket, the net income will be the same either way.

Registered investments

Recall from earlier that deductibility depends on whether an investment is able to produce taxable income. Accordingly, there is no deductibility when an investor pays a direct fee to an advisor for advice on RRSPs, RRIFs or TFSAs, all of which produce tax-exempt income. This is so even though withdrawals from the first two retirement account types will eventually be fully taxable.

RRSP or RRIF holding mutual fund

When a MER is charged within a mutual fund in a RRSP/RRIF, it reduces the fund’s investment return, just as it does for a mutual fund in a non-registered account. However, if a fund series with a reduced MER is used to allow a direct fee to be charged, the net tax result to the plan annuitant depends on the source used to pay that fee.

All money within a RRSP/RRIF is yet to be taxed, whether in a mutual fund or in the form of cash. A direct fee may be paid by a RRSP/RRIF trust using pre-tax cash held inside the account, effectively achieving the same result as when a MER is charged within a mutual fund. On the other hand, if the RRSP/RRIF annuitant pays a direct fee using non-registered/after-tax money, no deduction is allowed.

To illustrate the distinction, we’ll add a column in Example 2. The left column charges full MER, while the middle and right columns have a reduced MER plus a direct fee, respectively paid from within the RRSP/RRIF or out of non-registered/after-tax money. To show the final after-tax result, the income will be immediately withdrawn by the RRSP/RRIF annuitant. Though the amount available for withdrawal is highest in the right column, once the non-deductible direct fee is paid, the net income is $100 compared to $150 under either of the other two methods.

It should be noted that in order to show the after-tax comparison on the bottom line of Example 2, the non-registered money is actually sourced out of the RRSP/RRIF.

Instead, what if there were no distributions, and the direct fee in the right column was paid using a (non-registered) $100 bill you already had in your pocket? That would preserve $400 of RRSP/RRIF in the right column, which is $100 better than the $300 in the other two columns. More tax-sheltering room must be better, right?!

As appealing as that first appears, it’s an illusion until the tax is reconciled. If you cash out the $400 in the right column, you’re left with $200 after-tax. For the other two columns, your $300 nets to $150 after-tax, to which you can add the $100 bill in your pocket to total up to $250, still $50 better than paying a non-deductible direct fee.

TFSA holding mutual fund

As mentioned above, TFSA income is tax-exempt, so direct fees are not deductible. The net income of a mutual fund inside a TFSA will be the same whether fees are paid by MER, by direct fee from within the TFSA or by direct fee via a non-registered account.

But what about this idea of preserving tax-sheltering room by paying a direct fee from a non-registered source? As we just saw, that didn’t work out with RRSP/RRIFs, owing to the fact that later withdrawals from that type of registered account are taxable. By contrast, when a direct fee is paid from outside a TFSA, the preserved tax-sheltering room will ultimately be delivered through to the planholder as a tax-free TFSA withdrawal.

An alternative way to illustrate this is to assume that the TFSA itself is the cash source for the direct fee, as shown in Example 3. By any of the three column/methods, the net increase for the TFSA is $300. In the first two columns, all the money remains within the TFSA, but in the right column the planholder makes a $100 withdrawal to pay the direct fee, giving the planholder a $100 re-contribution credit the following January 1^st.

Related considerations

Financial planning

Financial planning addresses a person’s overall financial needs, including budgeting, saving strategies, credit/debt education, and tax and estate planning. To provide context and foundation for investment recommendations, financial advisors may engage in financial planning discussions and prepare formal plans.

As important as these services are in providing the personal context for investment advice, they are not directly related to earning income, and therefore any fees charged for financial planning are not deductible.

Tax preparation

Personal income tax return preparation fees are generally not deductible, regardless who is preparing the return. But if part of the preparation fee relates to calculating and reporting the details of business income and/or investment income, that portion may be deductible. For those whose income is derived principally through business income and non-registered investments, this could arguably amount to almost the full preparation fee.

It’s helpful if the fee’s components are itemized—or better yet, if the preparer renders a separate invoice for the business and investment-related fees.

Not applicable to segregated funds

Segregated funds are sometimes described as the insurance industry’s version of mutual funds. Despite the similarities to mutual funds, segregated funds are legally structured as annuity contracts (a form of life insurance) whose value fluctuates with a pool of investments that the insurer ‘segregates’ from its other assets.

The current position of the Canada Revenue Agency (CRA) is that a segregated fund is not a share or security, and therefore no deduction is allowed for investment advice related to the purchase or sale of segregated funds.

Reasonableness

There is a general requirement under the Income Tax Act that in order to claim a deduction, the outlay or expense must be reasonable in the circumstances. Reasonableness could be an issue if:

- A combined fee is levied for financial planning, tax preparation and investment counseling, allowing the client to choose how to allocate that among the services
- A single investment counsel fee is charged, covering RRSP/RRIF, TFSA and non-registered accounts, allowing the investor to determine how much is related to each account type
- Investment fees are pooled for multiple family members and charged disproportionately to one of them
- A higher fee is charged on non-registered assets compared to registered assets, even though the advice and/or service is otherwise indistinguishable

In all these situations, the investor’s deduction claim could be questioned as to reasonableness, bearing in mind that the legal onus lies with the taxpayer to prove entitlement to a tax benefit, not upon the CRA to disprove it.

Spousal RRSP Strategies

Strategically saving for future income splitting and tax splitting

Our tax rules allow you to put money in your own registered retirement savings plan (RRSP) or an RRSP of your spouse or common-law partner. We’ll use the term spouse to refer to spouse or common-law partner in this article.

- For your own RRSP, you are both the contributor and annuitant/owner.
- For a spousal RRSP, you are the contributor and your spouse is the annuitant/owner.

As contributor, you are entitled to claim a tax deduction, whether the funds go into your RRSP or your spouse’s. The annuitant is then taxed on later withdrawals from the plan – so long as you stay within the rules, as discussed below.

This can be a simple, effective tool to help couples get more spendable cash out of savings in retirement. It can also be used strategically to manage near-term cash flow and taxes, and to ease the transition in the years leading up to and into retirement.

Principal benefit: Income splitting in retirement

Our progressive income tax system levies higher tax rates as a person’s income increases. Generally, a household’s income tax bill will be minimized when two spouses’ incomes are equalized. That’s true whether you are in your working years or in retirement. The problem during your working years is that you can’t equalize by just giving away your current income to your spouse for current use.

However, current-you can equalize with future-you by giving/contributing some of your income to your RRSP. With the likelihood that you will require less income in your later years, this effectively shifts income down tax brackets. Better yet, if you expect your spouse to be at an even lower bracket, you can use a spousal RRSP to convert your current high income into your spouse’s future low income.

This does not mean that every allowable dollar should be contributed to a spouse’s RRSP. The idea is to equalize, not to swap positions, with a spousal RRSP being one way to get you closer to that happy medium.

How much can you contribute?

A person’s annual RRSP contribution room is 18% of the previous year’s earned income (to an indexed dollar maximum, which is $31,560 in 2024 ), plus unused room from previous years. If there are any contributions to a registered pension plan on the person’s behalf in the year, a pension adjustment will reduce that annual room.

Within that available room, there is no minimum amount or proportion that must be allocated to one’s own RRSP, nor any maximum that may be contributed to a spousal RRSP.

After age 71

Contributions can be made to an RRSP up until December 31 of the year that an annuitant turns 71. For your own RRSP, you can’t make any further contributions after you pass that year-end. However, you may still contribute to a spousal RRSP if your spouse is 71 or younger, no matter how old you may be yourself.

On death

Contributions cannot be made to an RRSP of a deceased person. However, a deceased person’s executor may make a spousal RRSP contribution from the estate in the year of death or within 60 days after the end of that year. The deduction for the contribution may be claimed on the deceased individual’s final tax return.

Non-qualified RRSP room

There are a few situations when special RRSP room can only be used for a taxpayer’s own RRSP. Even so, a spousal RRSP contribution may serve as a complement or substitute, depending on circumstances.

Commuting a registered pension plan

When leaving an employer, an employee has the option to commute the value of a registered pension plan (RPP) and roll it tax-free into a locked-in RRSP. If the commuted value is greater than the regulated limit for rollover, the excess amount is taxable in the year the pension is commuted. If the person has other unused RRSP room, the excess amount could be contributed to either the person’s own RRSP or a spousal RRSP to offset the tax.

Retiring allowance

A payment made in recognition of long service to a departing/retiring employee is taxable. However, for each year the person worked prior to 1996, $2,000 of the payment is eligible to be contributed to the person’s RRSP, plus $1,500 for each year employed prior to 1989. Such contributions do not require or affect existing RRSP room. If the person has other unused RRSP room, the non-eligible portion of the retiring allowance could be contributed to either the person’s own RRSP or a spousal RRSP to offset the tax.

Foreign pension

When a Canadian resident cashes out a foreign pension in a lump sum, the Canadian dollar equivalent is brought into income. However, special RRSP room is allowed in that year for the person to make an RRSP contribution up to the amount of that income inclusion. If the person has other unused RRSP room, the person could choose not to use the entire special RRSP room, instead allocating a portion of the cash to a spousal RRSP.

Canvassing more potential benefits

In addition to retirement income splitting, a spousal RRSP may be used to strategically manage tax in other ways. There are many considerations in determining whether and how to do this, with the main factors being the spouses’ current and future (expected) income levels and tax brackets, and the age difference between them.

Withdrawals in low-income years

In theory, a spousal RRSP can be used for income splitting at almost any stage of life. There is no legal requirement that a person be retired to take RRSP withdrawals, and in fact there is no formal definition of retirement in the RRSP rules.

One of the uses of a spousal RRSP could be as a standby reserve to bridge income during an unexpected employment gap, though preferably coordinated with a dedicated emergency fund. Alternatively, it could be an intentional part of a plan to manage a known upcoming low-income period, for example a planned work sabbatical or parental leave for the birth or adoption of a new child.

Still, care should be taken not to deplete a couple’s savings to the extent that their retirement may be put at risk. As well, the legal ability to take withdrawals does not change the fact that withdrawals are taxable, and possibly taxed to the higher income spouse, as discussed further on.

Participation in the RRSP Home Buyers’ Plan or Lifelong Learning Plan

Though an RRSP is designed for retirement savings, it may also be used to assist in the purchase of a new home or to pay for later life education. To participate in either program, one must be an annuitant of an RRSP.

- The Home Buyers’ Plan (HBP) allows up to $60,000 to be applied toward the purchase of a new home. With a spousal RRSP in place, this will double the amount to $120,000 available to a couple.
- The Lifelong Learning Plan (LLP) allows up to $20,000 to be applied toward education. The annuitant must be the student, so the existence of a spousal RRSP assures that each spouse may make use of the LLP.

Amounts taken out are not taxed if returned to an RRSP in the following years, in accordance with program rules.

Potential deferred RRIF conversion

All RRSPs must be matured by the end of the year that the annuitant turns 71. Maturing means either taking amounts into income, purchasing a registered annuity that makes annual income payments, or transferring to a registered retirement income fund (RRIF) – or a combination of these elements.

The application of this rule can be delayed by as many years that the annuitant of a spousal RRSP is younger than the contributor. That’s because RRSP closing/conversion is strictly dependent on the annuitant’s age, irrespective of who contributed.

Working with and around the pension income splitting rules

Under the pension income splitting rules, someone who receives eligible pension income (EPI) may split up to 50% of that amount with a spouse. This is achieved through a joint election made by the pensioner and the spouse when filing their annual income tax returns.

Under age 65

If the pensioner is under age 65, EPI is most often limited to RPP payments, though RRIF and annuity payments qualify if they come from a plan that was originally owned by a predeceased spouse. Otherwise, a pensioner must be 65 or over for RRIF and annuity payments to be EPI. Withdrawals taken directly out of an RRSP do not qualify as EPI at any age.

With a spousal RRSP, the couple can skirt around the age 65 criterion for RRIFs. Subject to the attribution rules discussed below, the annuitant/owner of a spousal RRSP may take withdrawals regardless of either spouse’s age. What’s more, the full amount will be taxed to the recipient, whereas the pension splitting rules require the pensioner to be taxed on at least 50% of the income before any amount may be split with a spouse.

Age 65 and over

Even if the pensioner is over 65 with the ability to split RRIF income, the existence of a spousal RRSP can provide greater flexibility. Per the last point in the paragraph above, a spousal RRSP gets around the need for a pensioner to receive taxable RRIF income first, before splitting with a spouse. That could be especially important in later years when a pensioner is receiving a greater portion of interest income in their non-registered portfolio, which may already be pushing the pensioner’s taxable income higher.

Consider as well that age 65 is when a person may begin Old Age Security (OAS). If a pensioner is close to the OAS recovery tax income threshold (See the article “OAS – Old Age Security” for details), then the benefit from splitting the RRIF may be offset by the clawback of future OAS payments. Facing that a prospect, a pensioner may instead decide to limit RRIF payments, with the unfortunate result that the couple may then be living a lifestyle below what is actually feasible. Meanwhile, that RRIF and its associated tax liability continue to grow. With a spousal RRSP in place, exposure to OAS clawback could be alleviated or avoided altogether.

Early withdrawals and attribution

Once a contribution has been made to a spousal RRSP, the annuitant/owner spouse is legally entitled to take withdrawals from the plan. The annuitant is taxed on those withdrawals, except when the withdrawal occurs in the year of contribution, or in one of the two immediately preceding taxation years. Withdrawals in that three-year period are attributed to the contributor. To be clear, attribution does not mean the contributor pays the annuitant’s taxes, but rather that the withdrawal is added to the contributor’s income, at a presumably higher tax bracket.

This attribution rule does not affect the annuitant spouse’s withdrawals from RRSPs to which he/she had been the only contributor. Such withdrawals are taxable to that annuitant/owner in the normal manner.

Contributions before year-end, or in the first 60 days of the year

Note that it is the year of contribution that matters, not the taxation year against which the contributor claims the deduction. To illustrate, a contributor is entitled to take a tax deduction when filing their 2023 income tax return, whether a contribution is made during 2023 or in the first 60 days of 2024. However:

- For contributions in the first 60 days of 2024, attribution may apply to withdrawals in 2024, 2025 or 2026.
- If instead a contribution had been made before 2023 year-end, the three-year attribution period would begin in 2023, and end in 2025 .

Multiple spousal RRSPs

One may wonder: Is it possible to get around the attribution rule by contributing to one spousal RRSP, while taking withdrawals from another? The answer is ‘no’.

The attribution rules cannot be avoided either by setting up multiple spousal RRSPs with one financial institution, or by spreading them across financial institutions. Attribution is based on contributions to any spousal RRSP, with the three-year look back rule applying to withdrawals from any spousal RRSP.

Commingling funds

A financial institution’s business rules may allow a spousal RRSP to be set up so that only the non-annuitant spouse may contribute, or both spouses may be allowed to contribute. As well, it may be established as a new account, as an addition to an existing spousal RRSP, or as a deposit to an existing RRSP of the annuitant.

In the last case, the contribution converts the account into a spousal RRSP, and it will always be treated that way thereafter. This is true even if later withdrawals exceed spousal contributions, and even if those withdrawals are attributed to the contributor spouse. It’s obviously important to be attentive to how contributions are arranged, as a misstep could seriously constrain the annuitant spouse’s ability to take non-attributable withdrawals in future.

Verifying tax slips, especially for online contributions

The tax slip for a spousal RRSP distinguishes which spouse is the contributor, and which the annuitant. Again, it is the former who gets the deduction, and the latter who owns the plan. When working with a financial advisor, a couple can confirm directly with the advisor that the contribution and tax slips align with their intentions.

Extra care should be exercised with online accounts, as it is generally necessary to be on the annuitant spouse’s connection to make the contribution. Some issues that may arise:

- The default setting may be for contributions to be recorded as being by that person to his/her own RRSP. If so, the annuitant spouse would get the deduction, not the intended higher income spouse.
- If the annuitant spouse does not have sufficient RRSP room, an over-contribution penalty would apply.
- Alternatively, if the higher income spouse is correctly identified as contributor, but the target account is the annuitant’s own RRSP, that account may unintentionally be converted into a spousal RRSP.

Review all elements of online transactions so that any necessary revisions may be made before the final click.

Ordering rules for withdrawal

When both spouses contribute, the expectation may be that withdrawals from spousal RRSPs will be proportional to contributions, or on either a first-in/first-out or last-in/first-out basis. On the contrary, all withdrawals in a year are deemed to be the contributor’s, up to the amount of his/her contributions in the three-year attribution period.

To demonstrate, assume the annuitant opens an RRSP with $5,000 in year one, to which the contributor adds $5,000 in year two. On a $6,000 withdrawal in year three, $5,000 is attributable. If the order is switched and the contributor initiates a spousal RRSP with $5,000 in year one, followed by $5,000 in year two from the annuitant, that $6,000 withdrawal in year three will result in the same attribution of $5,000 to the contributor.

Exceptions

Attribution does not apply in the following circumstances:

- Withdrawals occurring while spouses are living separate and apart;
- Withdrawals made during or following the year the contributor dies;
- An amount deemed to be received by a plan annuitant due to the annuitant’s death;
- Withdrawals in a year when either spouse is a non-resident of Canada;
- An amount transferred directly into another RRSP, or used to purchase an annuity that cannot be commuted for at least three years from the date it was purchased;
- An amount that is transferred to a defined benefit pension plan to buyback past service; and
- Amounts withdrawn from an RRSP in accordance with the rules of the HBP or LLP.

Repayments to the RRSP Home Buyers’ Plan or Lifelong Learning Plan

Both the HBP and LLP require that amounts taken out of an RRSP be repaid in the years following their use for the respective home or education purpose. Repayments need not be made to the same RRSP from which the funds originated, but must be to an RRSP of that same person as annuitant. This can provide some relief from the future application of the attribution rule, if withdrawals from a spousal RRSP are repaid to a non-spousal RRSP.

Repayments may not be allocated to a spousal RRSP of which the other spouse is the annuitant.

Any unrepaid amount is taxable to the annuitant in the year it was due. Fortunately, even if the repayment schedule begins within the three-year period related to contributions, attribution does not apply to missed repayments.

Conversion to RRIF

When a spousal RRSP is converted into a spousal RRIF, the three-year attribution rule continues to apply, but only to the amount above the annual RRIF minimum. Bear in mind that there is no RRIF minimum in the year that an RRSP is converted to a RRIF, so attribution applies from the first dollar of any RRIF withdrawals that year.

RRIF withdrawals may be based on the age of the annuitant or the annuitant’s spouse. Commonly, this is used to minimize the minimum RRIF withdrawal schedule for an older annuitant, by choosing the age of a younger spouse. However, it can also work the other way, with the annuitant of a spousal RRIF choosing the older spouse’s age, squeezing a little more out through a higher minimum that is not subject to attribution.

When attribution applies to spousal RRIF withdrawals, any attributed amount is not considered to be EPI for pension income splitting. The amount will be taxed to the contributor, even if the contributor is over age 65.

Withholding tax

Financial institutions are required to withhold tax on all withdrawals from RRSPs, and on the amount in excess of the minimum withdrawal for RRIFs. The annuitant will receive a tax slip showing total withdrawals for the year, and the amount of tax deducted/withheld.

The withheld tax is remitted by the financial institution to the Canada Revenue Agency (CRA), as a credit against the annuitant’s eventual tax due, and may contribute to a tax refund for the annuitant. The withheld tax cannot be used by a contributor spouse to whom any amount may be attributed.

The spouses must complete CRA Form T2205 “Amounts from a Spousal or Common-law Partner RRSP, RRIF or SPP to Include in Income.” Each attaches a copy of the completed form to their income tax return for the year.

US and other foreign recreational properties

Estate planning informing vacation planning

For decades, Canadian parents have piled their kids and pets into the car for the weekend trek to the nearby cottage, cabin or chalet.

These days, it is not uncommon to have a vacation property in another province or outside the country altogether. That’s an extra layer of complexity to contend with when thinking about selling or transferring the family getaway, including preparing for estate and capacity planning.

Wills and estate transfers

Generally, a Canadian Will is effective to deal with a person’s real property (real estate) in the home province, and personal property wherever it may be. In order to deal with real estate elsewhere, the Will has to be proven to the satisfaction of the courts/law in that other jurisdiction. While this is not an impossible task, it carries with it additional cost, time and potential uncertainty.

A second Will where the property is located?

With that in mind, it may be desirable to plan ahead by executing a second Will in that other jurisdiction. In so doing, it is crucial that the second Will doesn’t inadvertently revoke the person’s main Will, or otherwise alter distribution. An open dialogue between the lawyers in the two jurisdictions should keep plans aligned.

Discussions with the foreign lawyer should include gaining an understanding of tax obligations (currently and for the estate), and legal responsibilities of the executor. This may necessitate adjustments in the home Will, or at least some informal guidance.

Alternatively, it could lead to naming a distinct second executor, with appropriate allocation of powers and constraints between the two. This knowledge may even affect the owner’s longer term intentions for the property.

Incapacity while owning or being abroad

Arguably, the estate transfer is the easy situation as compared to responding to a crisis while an owner is living. For one thing, death is obvious, but incapacity not so much so. And while an estate transfer is a property matter, there are both property and personal issues to address while a person is living, with attendant greater urgency.

The act of naming substitute decision-makers has been a recommended part of estate planning for decades. The traditional term “power of attorney” (POA) is still used in many jurisdictions, and is otherwise understood as a generic reference even if other formal phrasing applies. And while it is usually intended that the power be exercised wherever the grantor or property may be, challenges can arise when foreign elements are involved.

Each jurisdiction has its rules on the execution process, witnessing, allowable language and format – sometimes requiring official forms – any part of which may be at odds with the home jurisdiction’s rules. Even if there are no such formal impediments, there can be delays (and associated costs) as individuals, health care workers and businesses assure themselves of their obligations, perhaps even requiring them to seek their own legal advice before being able to take instructions.

One may ask why there isn’t a common form and rules to get around these complications? Indeed, efforts have been made to do just that over the last decade through recommendations from the Uniform Law Conference of Canada and the Uniform Law Commission in the United States. However, it’s up to each province and state to decide whether to adopt these recommendations, and to date only a handful have gone that far.

Parallel POA planning

As with Wills, it may be desirable to have POA documents drawn up in the foreign jurisdiction in order to expedite action at critical times. In addition to the provisos about guarding against revocation and having open communications, some further questions should be canvassed:

- Can the same person be named in both jurisdictions? Are there practical/logistical/linguistic concerns that may lean toward naming a different person in the foreign jurisdiction?
- What events may cause an appointment to be revoked (eg., marriage, separation, bankruptcy)? If such rules differ between the jurisdictions, how will that be reconciled?
- What is the scope of the attorney’s activity for each jurisdiction? Are there gaps, how will they be handled?
- If it is intended that the home jurisdiction attorney has ‘final say’, is this possible under the foreign jurisdiction’s rules? How can an attorney be removed?
- Is compensation allowed/required/prohibited, and do the planning documents together guard against double-compensation?
- What checks are there to assure appropriate accounting and accountability for each attorney’s actions?

Tax points to ponder – Property in the United States

Given our geographic proximity, most of this cross-border planning will be with our neighbour to the south – or to the north if you’re crossing to Alaska. In fact, it is critical to appreciate that just like our provinces, each American state has its own rules. Accordingly, each individual/couple/family will need to cater their planning to their home province and the state that welcomes them.

And despite that we are near neighbours, we also can’t forget that the United States is a foreign country with its own tax rules. Like Canada, there are income tax powers at both the sub-national (state) and federal levels. Here are some important tax matters affecting Canadian owners and sellers of US recreational property.

Tax reporting on sale, including principal residence

Sale of a US property must be reported on a seller’s Canadian tax return, on a US federal return, and on a US state’s return if there is a state income tax. Capital gains are taxable in both countries, with the US gain based on the change in property value, and the additional factor of the exchange rate affecting the Canadian calculation. In theory, there could be a capital gain on one side of the border and a capital loss on the other. Ordinarily though there will be a gain for both, and Canada generally allows a foreign tax credit for US tax on a sale.

The Canadian principal residence exemption (PRE) can apply to property outside of Canada. The property may still be exposed to capital gains tax on the US side, as a foreign tax credit could not be claimed in Canada, since the PRE claim would result in no associated Canadian tax against which to use that credit.

Withholding tax on sale

When a foreign owner sells US real estate, the purchaser is required to withhold up to 15% of the selling price and remit that to the US Internal Revenue Service (IRS). The percentage can be reduced depending on the selling price and whether the purchaser intends to occupy the property. The withholding rate may be further reduced or eliminated if the seller obtains a certificate confirming that the ultimate US tax liability will be lower than the withholding rate. Otherwise, the seller can recover the tax by filing a US tax return following the sale.

US estate return and US estate tax

At a Canadian owner’s death, the executor for that non-resident must file a US estate tax return if the fair market value at death of the decedent’s US situated assets exceeds $60,000, regardless whether any tax is due.

As to that tax liability, real estate owned by a Canadian is US-situs property for the purposes of the US estate tax, but only if their worldwide assets exceed the exemption threshold, which is US$13,610,000 in 2024.