Valle: How cross-border tax residency can complicate your estate

My husband and I are Canadian and U.S. citizens living in New Jersey, but we spend a couple of months a year in Montreal. Since we are not Canadian residents, we are curious if my place of death would matter for tax and estate purposes if I were to pass away while visiting, and specifically, if Quebec’s rules related to wills would apply to us.

Thank you so much!

– Marion

As an American immigrant to Canada, I understand this concern all too well. An unexpected death during a visit in Montreal would be hard enough on your family. The last thing you want is a legal or tax mess in Quebec to make the situation even more agonizing for your loved ones.

But here’s the good news: Where you die matters far less than where you’re considered a tax resident and where your assets are located.

To get a better grasp on your unique situation, I spoke with Toronto-based financial planner Sam Rook, of Bird’s Eye Wealth Planners. Your question touches on three distinct but interrelated topics: Immigration, tax residency and estate planning.

Americans in Canada

“It does not matter where you die. It matters where your assets are located and the country you are a resident of while you are vacationing,” Rook says. Based on the limited details in your question, your hypothetical estate would not be subject to Quebec succession laws. But if you owned property in the province, then things become a bit more complicated.

Without a will, property in Quebec is governed by provincial law — and Quebec’s civil law treats wills differently than the rest of Canada. Foreign wills are not always validated by the court. A person “would have to at least create a will and testament that covers their Quebec portion,” Rook notes. In other words, if you own Quebec property, have a Quebec-compliant will. 

The bigger trap, though, is tax residency. Tax residency is not determined by immigration status. Someone on a tourist visa can still be considered a Canadian tax resident. Canada uses the Sojourning Test, which states that anyone who has spent 183 days or more in Canada becomes a tax resident. That can mean filing taxes on both sides of the border. If both countries claim you, tiebreaker rules weigh factors like family ties, economic ties, citizenship and other criteria to determine which country gets first crack at your tax dollars. 

Canadians in America

The situation is actually more complicated for Canadians spending substantial time in the United States, where the Substantial Presence Test has a tricky formula to determine who is considered a U.S. tax resident. 

• 31 days of the current year, and

• 183 days during a three-year period that includes the current year and the two preceding years counting:
  • All the days you were present in the current year, and
  • Plus 1/3 of the days from the previous year
  • Plus 1/6 of the days from the year before that

“Snowbirds get tripped on this all the time,” Rook says. “They think ‘well, I have to only worry about my health care,’ but they stay too long and then the equation for this is slightly different and suddenly the U.S. will say, ‘actually you know what you’re a U.S. tax person and now we’re going to you have to file tax returns,’” Rook says. 

If a Canadian snowbird dies in Florida while a U.S. tax resident, the Canada-U.S. tax treaty comes into play. The treaty’s tiebreaker rules would usually determine Canada has primary jurisdiction if that’s where the person mostly lived. This means the estate would be settled in Canada first, then the United States. As Rook explains: “If you have $1,000 in tax owing in Canada and $1,200 owing in tax in the United States, you’re going to pay your $1,000 to Canada first. Then you’re going to show the U.S. you paid $1,000 to Canada and then pay the remaining $200 to the U.S.” 

Americans and Canadians share the world’s longest undefended border and a lot of cultural overlap. This makes cross-border retirement in warmer climates appealing and increasingly common. But making that jump in retirement without fully understanding the ins and outs of immigration, taxation and estate planning is a bad idea.

Do you have a personal finance question? Send it to Carlo Valle at [email protected].

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