U.S. Gift Tax – What it Means for Canadians

Danielle Doan

The U.S. Gift tax is one part of the American transfer tax system. It was introduced in 1932 as a backstop to the U.S. estate tax.  Without the gift tax, large estates could be reduced by simply giving everything away prior to death. The gift tax was and still is not meant to raise revenue per se. Do Canadians have to worry about having to pay this tax? Possibly.  Here’s a primer of what you need to know.

First, Canadians who are citizens and resident here do have to worry about the tax if they own U.S. situs assets. U.S. estate tax, gift tax, and generation-skipping transfer tax may apply, and planning is important with a cross-border specialist in those cases. The lifetime gift exemption is available but must be prorated. It is fully available to U.S. citizens living in Canada however.

Definitions.  According to U.S. Publication 950, “the gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The gift tax applies whether the donor intends the transfer to be a gift or not." The Internal Revenue Code defines a gift as a `gratuitous transfer`. 

The Gift Tax Exemption. When you give a gift over the annual exclusion amount, the gift tax applies.  Using the exemption is an effective way to reduce the eventual estate taxes that may be payable. It can be used each year and gifts can be given to an unlimited number of individuals – children, grandchildren, or others – as well as certain trusts. More good news – it won’t use up the gift and estate tax exemption, either.  For 2023 the annual exclusion amount is $17,000 per individual. 

The Gift and Estate Tax Exemption.  With the passing of the Tax Cuts and Jobs Act of 2017, (the Trump tax reform), the annual basic exclusion amount for the gift and estate tax almost doubled in 2018 to U.S. $11,180,000 from U.S. $5,600,000. For 2022, the basic exclusion amount is US $12,060,000 per domiciliary. For 2023 $12.92 million ($25.84 million per married couple).

Here’s the bad news:  the increased exemption is temporary and will sunset on December 31, 2025, pending further action by Congress.

You must file a gift tax return to make the election to use part of your lifetime gift exemption amount.  Remember, you make a gift if you give property (including money), or the use of  property or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.

Keep in mind that any portion of your lifetime gift exemption that is used during one’s life is deducted from the estate tax exemption amount when the person dies if the gift doesn’t qualify for the gift tax exemption.  Generally, the following gifts are not taxable gifts:

• Gifts, excluding gifts of future interests, that are not more than the annual exclusion for the calendar year
• Tuition or medical expenses paid directly to an educational or medical institution for someone else
• Gifts to your spouse (U.S. citizen/resident spouse only)
• Gifts to a political organization for its use,
• Gifts to charities

Annual Exclusion

A separate annual exclusion applies to each person to whom you make a gift. The gift tax annual exclusion is subject to cost-of-living increases.

The above exemption for gifts to a spouse is only applicable if the gift is from one U.S. citizen/resident spouse to another and does not apply when the recipient spouse is a non-U.S. citizen or resident.  Under Code Sec. 2523(i)(2), an exemption is allowed by a donor to a spouse who is not a U.S. citizen.

If you are married, both you and your spouse can separately give gifts valued up to $17,000 to the same person without making a taxable gift. If one of you gives more than the $17,000 exclusion, it is possible to do some “gift splitting”.

Gift Splitting.  If you or your spouse makes a gift to a third party, the gift can be considered as made one-half by you and one-half by your spouse. This is known as gift splitting.  Both of you must agree to split the gift. If you do, you each can take the annual exclusion for your part of the gift. Currently, gift splitting allows married couples to give up to $34,000 to a person without making a taxable gift.

If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709 even if half of the split gift is less than the annual exclusion.

Make a difference.  Canadians with U.S. property may want to plan for more insurance to cover any U.S. tax obligations on death, or plan to give away more of their wealth before they die.  However, what is given and to whom needs to be carefully considered and should not be transferred without speaking to a knowledgeable cross border specialist.  

Know More - Earn a Professional Certificate.  For a comprehensive overview of cross border issues, enrol in the Knowledge Bureau’s Cross Border Taxation course.