And I know we don't know what's going to happen, politically. Obviously, Senate control really matters for this conversation. And there's an election coming up in January, which we're going to find out who controls the Senate. But maybe you could just take us through what President-elect Joe Biden was talking about so we can start thinking about implications.
- Sure. So based on his election platform, the proposed tax changes can affect corporate tax, individual personal tax, and US transfer tax. So there is a wide swath of individuals that could be impacted. So for our Canadian viewers, if you're a Canadian doing business in the US, clearly the corporate tax changes have an implication.
If you happen to be an American living in Canada-- I understand there is perhaps close to a million of them-- clearly, the personal income tax changes are going to have a direct impact on you, because, keep in mind, although you might be a Canadian tax resident and subject to Canadian tax, you still have the obligation to file with the IRS and report worldwide income to the US.
And, finally, perhaps the most concerning is the US transfer tax change because it impacts both Americans in Canada and those that are purely Canadian, so Canadian citizens, Canadian residents, like you and I. And maybe just for a brief background here, Kim, US transfer tax is basically a property transfer tax system, which taxes property when it transfers from one generation to the other, so typically at death. And this tax is quite draconian.
I mean, first of all, there is no correlation to capital gains, which is what most Canadians would be used to is that in death in Canada, you pay tax on any accrued gains. Well, that does not matter under the US transfer tax regime. It's strictly a haircut off the top. The present top marginal tax rate is 40%. And that's expected, under President-elect Biden's plan, to go up to 45%. And although there is a fairly generous exemption in place today at roughly $11.5 million US dollars, that exemption is expected to drop drastically to $3.5 million US.
So just imagine. I mean, imagine you are a Canadian that has no US connections. Perhaps you've never even visited the US. Yet, because you happen to own certain types of US property-- and this, of course, would include US stock, so very common for Canadians to own that, perhaps a US brokerage account, or real property in the US-- but all of a sudden those US assets are now subject to this US transfer tax regime.
- I know we're not going to be able to delve into every one of these, Chris. But if you wouldn't mind, can you take me through an example of the US property transfer tax, and just a real example how that can play out.
- Sure. Let's make up some fictional numbers here. We'll go with Mr. Taxpayer, who owns, of course, a house, maybe their vacation property is what they own in the US, so they have a condo in Florida somewhere. Perhaps they have a business, so that value accrues to them. There is likely life insurance at the personal or corporate level. And let's say, fictitiously, this individual is worth about 6.5 1/2 million Canadian.
Now, the silver lining here is that Canada and the US have a tax treaty. And under that treaty, Canadians do get a credit if this US transfer tax applies. So for this individual, of course, the US transfer tax would apply because they own the right kind of property in the US. They own land in the US, this condo I talked about. And up until now, the rule of thumb for them would be, look, if your worldwide estate, the 6.5 million that you're worth, is less than the prevailing US estate tax or transfer tax exemption amount, which is, like I said, about $11.5 million USD for 2020, well, you don't need to worry.
You may have a filing obligation, but the way the credits work under our tax treaty, you will not have a tax payable. This could change overnight for this individual. If President-elect Biden's tax reform is enacted, and the exemption drops to $3.5 million US, well, this individual is squarely caught below that exemption. So they have a filing obligation. And, of course, they may have a tax due because their assets exceed that exemption amount. I hope that helps.
- Well, it's a lot. And I think people have to think about it. But let me ask you, if you wanted to-- and I've only got about a minute and a half here, Chris-- but if you wanted to make plans around these proposed changes, what do you do?
- Right. So there likely is some planning that you can do. And, again, I apologize if I get a little bit technical here. The planning is different if you're an American living in Canada or if you're a Canadian. If you're an American, your planning window is a bit short. For an American, the whole worldwide property is subject to this tax. So, clearly, for them, the plan is to get below this exemption amount. If I'm below the exemption today, that's fantastic. But if my net worth exceeds what the exemption might be in 2021, well, the easy plan might be to give away my assets, gift my assets to my family today perhaps.
And the nice thing with that plan is when you make a gift, yes, you're subject to gift tax. But you have this $11.5 million exemption that can shelter that gift from tax. So sort of like use it or lose it. You might as well use it now, shelter the gift from tax. And if the exemption drops in 2021, no worries, you're prepared. For Canadians, the planning is simpler. And it isn't necessarily a short window. You may want to bring your net worth down below that US level. And there's many, many ways for Canadians to do that.
- Chris, great insight, as always, thoughtful. And we'll have you back to talk more about the capital gains tax because we got the highlights, but we didn't get the details. Chris, thanks so much.
- Thank you, Kim.