US Estate Tax: US Stocks Purchased Through Canadian Brokers and Other Intangibles

By John Mill LL.M.

Recently I was asked by a student in The Cross Border Taxation Course whether US stock purchased through a Canadian broker is a ìtangibleî for US estate tax purposes. This is a good question because in general terms non-resident aliens only have to worry about US estate tax attaching to tangible property situated in the US. The term used to describe this category of property is ìUS situs propertyî.

The answer to the question is ìno ñ US stock is always an intangibleî. However, when it comes to the US estate tax consequences, US stock, the situs of the stock and the mode or manner of stock purchase are irrelevant. The estate tax sections in ìSubchapter BóEstates of Non-residents Not Citizens of the United Statesî set out the US estate tax consequences of owning US stock at death:

IRC ß2104. Property within the United States

(a) Stock in corporation

For purposes of this (estate tax) subchapter shares of stock owned and held by a non-resident not a citizen of the United States shall be deemed property within the United States only if issued by a domestic corporation.

However, once a stock is gifted it no longer forms part of the estate for estate tax purposes. Gifts of US stock are treated differently than bequests of US stock because the IRC says intangibles are exempt from Gift tax, US stocks are intangibles:

ß2501. Imposition of (Gift) tax

(a) Taxable transfers

(1) General rule

A tax, computed as provided in section 2502, is hereby imposed for each calendar year on the transfer of property by gift during such calendar year by any individual resident or non-resident.

(2) Transfers of intangible property

Except as provided in paragraph (3), paragraph (1) shall not apply to the transfer of intangible property by a non-resident not a citizen of the United States.

Now let's switch gears to the old ìcash in the mattressî debate: is ìcashî an intangible? On the one hand cash represents a ìrightî to a certain value; on the other it is a fungible ìbearerî instrument that you can hold in your hand. The IRS says cash located in the US is tangible property subject to US estate tax; others disagree. I am not aware of any cases one way or the other.

There is no list of US situs assets, the facts surrounding each asset are unique and must be considered. IRC ß2105 gives some guidance including the fact that bank deposits held by NRAs are considered property ìwithoutî the US. IRC ß2105. Property (of NRAs) without the United States":

(a) Proceeds of life insurance

For purposes of this subchapter, the amount receivable as insurance on the life of a nonresident not a citizen of the United States shall not be deemed property within the United States.

(b) Bank deposits and certain other debt obligations

For purposes of this subchapter, the following shall not be deemed property within the United Statesó

(1) amounts described in section 871 (i)(3), if any interest thereon would not be subject to tax by reason of section 871 (i)(1) were such interest received by the decedent at the time of his death,

(2) deposits with a foreign branch of a domestic corporation or domestic partnership, if such branch is engaged in the commercial banking business,

(3) debt obligations, if, without regard to whether a statement meeting the requirements of section 871 (h)(5) has been received, any interest thereon would be eligible for the exemption from tax under section 871 (h)(1) were such interest received by the decedent at the time of his death, and

(4) obligations which would be original issue discount obligations as defined in section 871 (g)(1) but for subparagraph (B)(i) thereof, if any interest thereon (were such interest received by the decedent at the time of his death) would not be effectively connected with the conduct of a trade or business within the United States.

Notwithstanding the preceding sentence, if any portion of the interest on an obligation referred to in paragraph (3) would not be eligible for the exemption referred to in paragraph (3) by reason of section 871 (h)(4) if the interest were received by the decedent at the time of his death, then an appropriate portion (as determined in a manner prescribed by the Secretary) of the value (as determined for purposes of this chapter) of such debt obligation shall be deemed property within the United States.

(c) Works of art on loan for exhibition

For purposes of this subchapter, works of art owned by a nonresident not a citizen of the United States shall not be deemed property within the United States if such works of art areó

(1) imported into the United States solely for exhibition purposes,

(2) loaned for such purposes, to a public gallery or museum, no part of the net earnings of which inures to the benefit of any private stockholder or individual, and

(3) at the time of the death of the owner, on exhibition, or en route to or from exhibition, in such a public gallery or museum.

(d) Stock in a RIC

(1) In general

For purposes of this subchapter, stock in a regulated investment company (as defined in section 851) owned by a nonresident not a citizen of the United States shall not be deemed property within the United States in the proportion that, at the end of the quarter of such investment company's taxable year immediately preceding a decedent's date of death (or at such other time as the Secretary may designate in regulations), the assets of the investment company that were qualifying assets with respect to the decedent bore to the total assets of the investment company.

(2) Qualifying assets

For purposes of this subsection, qualifying assets with respect to a decedent are assets that, if owned directly by the decedent, would have beenó

(A) amounts, deposits, or debt obligations described in subsection (b) of this section,

(B) debt obligations described in the last sentence of section 2104 (c), or

(C) other property not within the United States.

(3) Termination

This subsection shall not apply to estates of decedents dying after December 31, 2007.

Some other rules that may assist are:

Annuity contracts enforceable against a U.S Corporations are U.S. situs property. Treas. Reg. ß20.2104- 1(a)(4).

Partnership interest have situs where the partnership business is carried on. Rev Rul 55- 701, 1955-2 CB 836.

A beneficial trust interest that does not terminate at his/her death, situs is determined by the situs of each asset held by the trust.7 See Comm'r v. Nevius, 76 2d 109 (2d Cir.), rev'g 30 BTA 70, cert. denied, 296 US 591 (1935).

As stated in the course material the Competent Authority (CA) assists taxpayers, who make a formal request, in resolving cross border disputes with tax authorities. The CA does not provide advice or assist in the filing of returns.

John Mill LL.M., is a Canadian lawyer specializing in cross border issues and author of The Knowledge Bureau's Cross Border Taxation Course.