Management of Canadian Estate with Canadian and U.S. Beneficiaries

This is our main tax information forum which deals with topics concerning Canadians living and working in the U.S., U.S. citizens contemplating working in Canada, and all aspects of Canadian and U.S. income tax and related adminstrative issues.

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Joined: Wed Oct 09, 2019 11:42 pm

Management of Canadian Estate with Canadian and U.S. Beneficiaries

Post by tropikdreamz50 » Thu Oct 10, 2019 12:01 am

My mother recently passed away in Ontario, leaving an estate worth about $1.2 Million Canadian. About 85-90% of the value of the estate is currently invested in a fully paid off condominium. The decedent was a Canadian citizen from infancy until 1979, moved to the U.S. and acquired a U.S. green card in 1980 and returned to Canada in 1997. She worked and paid taxes in the U.S. between about 1980 and 1993. To my knowledge, she never effectively renounced U.S. permanent residency. We are still chasing the relevant paperwork. However, to my knowledge, she did not file U.S. tax returns between 1997 and 2019, while living in Canada.

There are three beneficiaries (the children of the decedent), two of whom live in Canada, and me who lives in the U.S., who will split the estate equally. Sibling 1 (my brother) a Canadian citizen, was born in Canada and has not lived anywhere else. Sibling 2 (me) lived in Canada until 1979, then migrated to the U.S. and has lived here since. I am a dual Canadian-U.S. citizen. Sibling 3 (my younger sister) has lived in Canada most of her life, but acquired a U.S. Green card in 1980 and lived mostly in the U.S. between 1979 and about 1993. My sister is the sole executor of the will. I don't believe that my sister ever effectively expatriated from the U.S. either. My sister is a Canadian citizen, and quite possibly a U.S. permanent for tax purposes (since she lived in the U.S. for over eight of the thirteen years prior to 1993).

My purpose in posting here is to determine the best course forward for dealing with what I understand will be complicated and expensive tax issues under both Canadian and U.S law. One issue that concerns me in particular is the prospect of my being held liable for my mother's unpaid U.S. taxes, once I receive my share of the estate, if these tax issues are not handled at the estate administration stage. For this reason, I intend to lobby in favor of having the estate settle all outstanding tax filings, and tax payments (overdue tax, penalties, and interest included) before any monies are distributed to the beneficiaries.

The reasons seem obvious to me, but I'll summarize them, in case any of my assumptions are incorrect. I want the burden of paying any late taxes and associated penalties and interest shared by all parties, since the errors, if any, were made by the decedent and and the cost of those errors should be borne equally by all the beneficiaries. Secondly, if I end up being solely responsible for any unpaid U.S. taxes (and penalties etc), the determination of the total amount of unpaid taxes won't even be known prior to my accepting my share of the estate. That would be scary, since I wouldn't know upon deciding to accept or decline my share whether the taxes and penalties etc would exceed the $300K or so that my estate share will be worth. My questions follow.

Question 1: Does the executor (which I now understand is known as an estate trustee in Ontario) have a binding legal duty to pay all domestic and foreign taxes before distributing the estate money to the beneficiaries under Ontario or Canadian law? Perhaps more relevantly, is there a Ontarian/Canadian legal duty to pay all foreign taxes that an Ontario probate court would review and enforce as a standard part of processing a will/estate?

Question 2: if the answer to Q1 is yes, and there is any hesitation to pay the foreign taxes by the executor, would I be entitled to take legal action to force the executor to pay the foreign taxes? (Hopefully, it wouldn't come to this. I would hope that if I'm able to prove that I have such a right, the other parties will comply with the law, and save all of us the hassle and expense of litigation).

Q3: I don't believe that the executor has selected an estate firm as of yet. Accordingly, I am in the market for recommendations for suitable law and accounting firms to handle this matter and more importantly reasons supporting the recommendation. I'm aware that this forum is affiliated with an accounting firm. However, since I'm not the executor, it would help to have some solid reasoning supporting the selection of one firm (or group of firms [not sure if both an accounting firm and a law firm are needed]) over another.

Q4: In these type of back-tax and penalty/interest situations, does anyone here know whether the U.S. IRS is in the habit of compromising on the total tax penalties due to avoid creating an impossibly high debt load for the estate? Nothing I can do about that right now, but it would at least feel good to hear a favorable answer.

I'm aware that I may have touched on only a fraction of the legal issues involved here. However, the prospect of being liable for the decedent's unpaid taxes is the issue currently keeping me up at night, so I asked about that first.

At this point, I don't know if the not-yet-fully-implemented U.S. I.R.S. Section 2801 "expat tax" even applies in this situation, since it's not clear that my mother ever properly expatriated from the U.S.

Thanks in advance for any help this board can provide.

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