Owning US Real Property

Given the price of US real estate and our strong dollar, many Canadians are buying or thinking about buying a US vacation property.  If you own or are planning to purchase US real property, you should know whether your Canadian will and POA’s are considered valid in the jurisdiction where your property is (or will be) located.  If anything should happen to you, will your executor or attorney for property be able to deal with your US real property?

It is also important to know that if you live in Canada but own property in the US, you may be exposed to double taxation upon your death which arises from Canada’s deemed disposition rules as well as the non-resident estate tax imposed by the US.  Although there may be some relief under the US/Canada Tax Treaty, you’ll need professional advice to understand how you may be impacted and what steps you should take to minimize tax.

US Citizens Living in Canada

If you have dual US-Canada citizenship or if you are a US citizen resident in Canada, there are important issues to consider.  Unlike the Canadian tax system which is primarily based on residency, the US tax system is based on residency as well as on citizenship.  Did you know that:

• All US citizens regardless of where they live, US residents, and green card holders are required by law to file a US tax return. If you have a parent who was born in the US, you may be considered a US citizen even though you have never worked, lived, or attended school.  As a result, you may have US tax filing obligations.
• Failure to submit the required filings on time could result in significant consequences such as passport renewal being denied or being refused entry into the US until tax filing/records are up-to-date.

If you are travelling to the US this winter, currently own or are thinking of purchasing  property in the US, or have US citizenship, be aware of the unique tax, financial, and estate planning issues that you need to consider.  I encourage you to seek the advice of a knowledgeable expert in both Canadian and US tax and estate planning matters that can assist you and provide you with advice as to your obligations and options.

• travelling to the US,
• buying or thinking of buying US real property,
• living in Canada but are a US citizen.

For all of these situations, there are estate planning considerations of particular importance to ensure that your legal obligations are met.

Travelling to the US

Not far behind our fine feathered friends who are heading south right now, many Canadians will soon head south for a winter escape.  Even if it’s just for a brief family trip to Disney World at Christmas or March break, if you are preparing to get away from the cold, ensure that your will and powers of attorney (POA) are up to date before you go.  Does your will reflect your current wishes? Does your executor know that he or she has been named and where to find your documents?   If your children are under 18, does your will name a guardian?   Will your POA’s be recognized in the jurisdiction you will be visiting?

If you plan an extended stay, you need to know how long you can legally remain in the US as a visitor.  Astonishingly, there are four different sets of rules that govern residency. These rules often conflict with each other and compliance under one set of rules may not equal compliance under the others. For example, under the immigration rules, a visitor can legally remain in the US for up to 6 months while under the income tax rules, an individual will be deemed a US resident for tax purposes if legally present in the US for more than four months a year (the days need not be consecutive). There are also estate tax rules for which a specific set of facts and circumstances determines residency.  Under provincial medicare rules, most provinces require an individual to be present in the province for a minimum of six months and have a permanent residence in the province to remain eligible for coverage.

Next time, I will take a brief look at issues related to owning US real property and US citizens living in Canada.

The things I like most about the iPad are how easy it is to use and how truly portable it is. A gentle, quick swipe or two and the screen scrolls right, left, up, down. A two-finger expanding pinch makes tiny text easier on aging eyes. Touch it with a finger in the right place and magical things happen … a book page turns, a letter appears, an unwanted email disappears, photos scroll by. How easy is that!

And it’s hard to beat the iPad’s portability. Given the choice of 8 pounds, 4 pounds, or 1.5 pounds, I know which one I’d rather carry. My laptop plus charging brick weighs just over 8 pounds. My netbook weighs about 4 pounds including a slightly smaller charging brick. My iPad with its feather-weight charging cord add up to less than 1.5 pounds. If the device weighing the least can do all I need it to do, why lug around the extra weight?

And have I mentioned the apps … over 140,000 and counting last time I checked. Many are free and those that aren’t free generally range in price from 99 cents to $19.99. Of the apps that I’ve downloaded for work purposes, most cost less than $10 each. A few work productivity apps that I’ve discovered so far include Dragon Dictation, DocsToGo®, IAnnotate™ PDF, HandySign, GoodReader®, iThoughtsHD, and LogMeIn® Ignition. For travel planning, the apps I’ve found useful include Hipmunk, TripIt®, Kayak, WeatherEye, and Trip Advisor®, all of which I’ve been using on my PC for years. To manage information, I was glad to find apps for Evernote® and DropBox which I already use on my PC and some others that are new to me such as Flipboard™.

Of course, there are just a few(!) games available. Trainyard (99 cents) is easy to learn but rapidly increases to more challenging levels as you use it. Love that you can design your own Trainyard layouts. So far I’ve restrained myself from downloading many games. But really, I should try a few more, don’t you think? All work and no play makes Jack (or Jill) very dull!

The iPad is not all sweetness (ease of use) and light (as in light-weight) however. It is annoying not to be able to view Flash(tm) media, printing is a challenge, and learning a new user interface takes time.

But despite a few bumps in the road, I’m well on my way to knowing and loving my iPad! Thanks, Steve!

Answer: Any Canadian resident under the age of 60 and who qualifies for the federal Disability Tax Credit is permitted to have an RDSP.  An RDSP has a $200,000 lifetime contribution limit; however, there is no annual contribution limit. There are no restrictions on when the funds can be withdrawn or for what purpose they can be used once withdrawn. The supplemental grants and bonds provided by the Government of Canada are only available until age 49 and only if certain conditions are met.

Withdrawals from an RDSP must begin at age 60. There are minimum and maximum withdrawal amounts which are based upon various formulas. For example, the amount, generally monthly, is based on how much is in the plan when withdrawals are to begin and the life expectancy of the beneficiary.

For ODSP purposes, RDSPs are fully exempt and are not considered income or an asset. Withdrawals are not considered income by ODSP; however, once the withdrawal is received by the beneficiary, the $5,000 asset limit would then apply.

A recent court case from BC, McDermid v. McDermid, has confirmed this and illustrates the importance of ensuring that your intentions are clear.  The case essentially pitted one brother, Robert, against another brother, Greg, in a dispute over a piece of property owned by their mother at her death. Approximately five years before she died, their mother transferred the property from her sole name into joint tenancy with Robert.  Greg argued that their mother intended that upon her death, her half of the property should be divided equally among himself and his two other siblings, namely, Larry and Janice. Robert said that his mother intended him to receive her half of the property upon her death as a gift.

The BC court relied upon the decision in Pecore v. Pecore that deals with transfers between a parent and a child. As a result of this case, where a parent has transferred property to an adult child and the child has not paid anything for that transfer, the law does not presume a gift. Instead it is presumed that the parent intended that the child hold the property in trust for the parent (or parent’s estate).  If the parent wants the adult child to have the property on the death of the parent, the adult child must present evidence to rebut the presumption and to demonstrate that the parent intended a gift.

In McDermid v. McDermid, the court reviewed the evidence of each of Robert and Greg in an effort to determine what their deceased mother intended at the time of the transfer. In the end, the court relied most heavily upon a note written by the deceased in which she states that upon her death, her son could divide her half of the property among her other children ‘if [he] so wishes’. The court held that this did not establish a trust but was a mere desire or wish. Taking the evidence as a whole, the court held there was sufficient evidence that the deceased, by transferring the property into joint tenancy with her son, intended to gift her half of the property to Robert upon her death.

Undoubtedly, this dispute caused significant, if not irreparable, damage to the siblings’ relationships with each other – not the kind of legacy most parents would intend and surely not the outcome their mother envisioned when she transferred the property to Robert.

With careful planning, having this happen to your family can be avoided. If you hold, or are planning to hold, any asset jointly with one of your adult children, be sure that you:

• Know exactly how joint title is held;
• Understand the consequences of joint ownership and particularly what happens if one of the joint owners dies; and,
• Ensure that your intentions for what is to be done with the property upon your death are clear and in writing.

As always, we urge you to seek the advice of a qualified professional before you change the title of any assets. There are a number of things to consider when changing the title of an asset.  For example:

• Are there tax considerations?
• What if a joint owner goes bankrupt or is sued?
• What if the marriage of a joint owner ends in separation or divorce?

Ensure your intentions for holding the asset jointly with your child (or anyone else) are clear and in writing. Do not rely on your children to do what’s ‘right’ or to follow your ‘wishes’.

Answer: Generally, in Ontario, a person who is mentally capable of making a will is free to leave his or her estate to whomever they wish.  A parent could exclude a child from his or her will; however, if the parent had a legal obligation to support the child at the time the parent died, the parent’s estate could be subject to a claim to continue that support. If a child is not named as a beneficiary of a parent’s estate and if the child believes they are entitled to support, an application could be made to court asking for support from the estate.  Whether or not the application would succeed would depend upon many factors and the result could not be guaranteed.

 A child who has been excluded as a beneficiary could challenge the will in court if there is evidence that the parent was influenced by someone to leave the child out or if the parent lacked testamentary capacity at the time of signing the will.

In a POA PPY, you, the ‘grantor’, can name one or more individuals or a trust company to act on your behalf when you are not in a position to manage your property and financial affairs. This may be due to mental incapacity, illness, physical limitations, or travel. Many people choose to appoint a trusted family member or friend while others choose their lawyer or a trust company. Be sure to name someone who is not only financially astute but organized, trustworthy, and conscientious.

If you grant a broad POA PPY, your attorney can basically do anything that you can do with your property except make or alter your Will. So, for example, he or she can:

• pay bills;
• withdraw cash from bank accounts;
• open and remove items from your safety deposit box;
• file income tax returns; and,
• sell your house.

A POA PPY can be drafted so that it limits the attorney’s authority to certain assets or actions. For example, if you are a business owner, you will likely have a POA PPY to deal specifically with your business interests  and a general POA PPY to deal with all of your other property.

If you become incapable of managing your financial affairs and do not have a valid POA PPY, no one can manage your financial affairs. To do so, someone will have to seek guardianship of your property. This can be both costly and time-consuming. If you are unable to act due to an illness or accident, this can add another layer of stress and emotional turmoil to an already difficult situation for your loved ones. In certain circumstances where there is no POA PPY, the Public Guardian and Trustee will step in.

Tom Cruise only had it half right when he immortalized the phrase “Show me the money”. He should have gone on to say “Show me your Power of Attorney for Property”. See an estate planning specialist and sign your Power of Attorney for Property today!

To develop the pitch, Matt suggests answering these three questions:

1. Who do I help? (5 words)

2. What do I do for them? (7 words)

3. Why do they need me? (5 words)

Intrigued by the idea, I thought I’d give it a try. The first line was the easiest, ‘I help individuals and families’. The second line eluded me for a day or so as I tried various words and phrases. Nothing seemed quite right.

So I skipped ahead to the third line. Our firm’s tag line, ‘Knowledge, Compassion, Peace of Mind’ provided the necessary inspiration, ‘Giving everyone peace of mind’.

Through trial-and-error and having patience (not my strong suit!) while the idea percolated, I eventually came up with a seven-word summary of the services I provide, namely, develop, implement, and administer comprehensive estate plans.

I’m pleased with the result which, I think, summarizes very well the ‘who, what, and why’ of my law practice:

I help individuals and families

Develop, implement, and administer comprehensive estate plans

Giving everyone peace of mind.

Give it a try and let me know what you come up with. Thanks to Matt for a neat and novel idea. And thanks to @danpinnington for the tweet.

One major, and possibly contentious, issue may be the use of the cottage itself. How will usage of the cottage be determined? Will a formal schedule be prepared? What about usage by family and friends of the owners? Be sure to fully negotiate this issue with all parties.

Consider such issues as one owner wishing to sell as well as the illness or death of an owner:

1. What will occur if one owner decides to share his or her share? Should there be any conditions? Should the agreement provide that one owner can offer to buy out another owner at a specific price but the offeror also must be willing to be bought out at that price if the offeree so chooses? How is the value of the share to be determined?
2. Consider an illness of an owner resulting in lack of use and/or lack of participation in decisions? Will an Attorney for Property take over or the remaining owners?
3. Consider the death of an owner. What happens to his or her share? Do the surviving owners have any control over who they will share the cottage with?

As disputes will invariably arise, determine an appropriate dispute resolution mechanism such as mediation.

Consider how often the cottage agreement should be reviewed and what should be the procedure for amending the cottage agreement.

Lastly, but certainly not least, confirm that all owners have up-to-date Wills and Powers of Attorney.

If you share ownership of a cottage, to ensure maximum enjoyment and minimize potential problems, don’t delay in having a cottage agreement prepared. Take the time to consider the issues I have set out over the last few blogs and ensure your agreement meets the needs and concerns of all parties involved. A little upfront legwork could save not only time and money but even your relationships with the other co-owners should any issues arise. As always, I encourage you to seek the appropriate legal advice from a professional with the necessary expertise.

1. If the cottage is not already owned, how should the purchase price be divided?
2. How should title to the property be held? For example, who should be involved, owners and spouses or owners only? How should title be held among the various owners, as joint tenants with right of survivorship (last one alive owns it) or tenants-in-common (each person’s share passes on death as per the person’s will; if no will, according to provincial intestacy laws)?

Next, consider the ongoing operating costs, such as property taxes, utilities, heat, hydro, and telephone:

1. How will such expenses be shared? Equally? Proportional with use?
2. Should there be a joint bank account from which such expenses are paid?
3. At which bank should the account be opened? Who should have signing authority?
4. What should each party’s initial contribution be? What about future deposits?
5. What happens if one owner does not contribute (or is unable to do so financially)?
6. Should such operating funds be invested or just kept in an account with low or no interest?  If interest does accrue, who is to report it?

Consider capital costs (major improvements):

1. What will be the process for determining if and when capital improvements should be made?
2. What will be the process for determining how much should be spent on each capital improvement and who should do the work?
3. What if one owner wants an improvement and other(s) do not?

You may want to consider a schedule for periodic inspections of the cottage by all parties to determine if any repairs,  maintenance, or capital improvements should be undertaken. This could be done semi-annually, for example, at the beginning and end of the cottage season.

Your agreement should also address insurance coverage for the cottage, especially coverage for liability claims.

Next week I’ll set out a further series of issues which cottage owners will want to consider before having a cottage agreement drafted.