Corporate class mutual funds—avoid U.S. estate tax
Case Studies
Scenario: a Canadian resident who’s not a U.S. citizen may be subject to U.S. estate tax
After meeting with his advisor, Robert, who’s a Canadian resident¹ but not a U.S. citizen, was surprised to discover that, on his death, he may be subject to U.S. estate tax.² Robert could be subject to U.S. estate tax on his U.S. situs property (aka U.S.-situated assets) if the value of his worldwide estate at the time of his death is above a certain threshold.³
U.S. situs property includes, but isn’t limited to, U.S. real estate (e.g., a vacation home in Florida) as well as U.S. securities (e.g., shares of Apple Inc.). U.S. securities are considered U.S. situs property even if they’re held in a Canadian brokerage account, including in a registered account such as a registered retirement savings plan (RRSP) or tax-free savings account (TFSA). As a result, if Robert passes away holding U.S. securities directly, he could be subject to U.S. estate tax on those holdings.
Solution: avoiding U.S. taxes on U.S. holdings
To avoid potential U.S. estate tax on his U.S. security holdings, Robert can make an investment in a Manulife Investment Management corporate class mutual fund. By owning an investment in a corporate class mutual fund, Robert is investing in shares of a Canadian mutual fund corporation. Shares of a Canadian mutual fund corporation aren’t considered to be U.S. situs property, even if the fund invests in U.S. securities.⁴ Thus, on his death, the value of his investment in a corporate class mutual fund that holds U.S. securities isn’t subject to U.S. estate tax.
Outcome: save taxes
Corporate class mutual funds allow Robert to invest in U.S. securities without attracting U.S. estate tax on his death, which, depending on the value of his worldwide estate, could result in significant tax savings. In addition, he can take advantage of the other benefits associated with corporate class mutual funds, such as the pooling of expenses, tax-efficient income, and tax-efficient cash flow using Series T.
For more information on Manulife Investment Management’s corporate class mutual funds and how they can help, speak to your advisor or refer to the corporate-class section of our “Tax-efficient solutions” web page.
1 The reference to resident means “resident for Canadian tax purposes.” 2 The case study is written for Canadian residents and isn’t applicable to U.S. citizens residing in Canada, U.S. residents (including green card holders), or Canadian citizens living in the U.S., as they face significantly different tax consequences. Accordingly, individuals should speak to their cross-border tax specialist about their specific situation. 3 In 2017, the Tax Cuts and Jobs Act, H.R.1 doubled the base exclusion amount for estate and gift tax to US$10 million (to be indexed for inflation). For 2023, the basic exclusion amount is US$12,920,000 with a maximum tax rate of 40%. 4 Units of a Canadian mutual fund trust, exchange-traded fund, or segregated fund contract are also not considered U.S. situs property.
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