It is possible that life insurance proceeds can be subject to US estate tax regardless of whether the life insurance is issued by a Canadian or US insurer, even if you are not a US citizen.
Canadian citizens or residents, who are not US citizens or resident aliens, whom own US-situs assets can be exposed to US estate taxes. US-situs assets include tangible property such as:
- Real estate located in the US
- Shares of US publically traded corporations
- Units of US mutual funds or money market funds
- Deposits in US brokerage accounts
- Shares in a US private company
- Bonds, debentures and loan instruments issued by a US corporation or trust
If you own US-situs assets under $60K and your worldwide assets (total assets, not just US) are less than $5.43M (US-2015), US estate tax is not payable. However, if you have US-situs assets of $60K or more, US estate tax is payable if worldwide assets are $5.43M and above.
Worldwide assets include: life insurance proceeds on your life if you own the policy directly or indirectly such as through a corporation in which you own more than 50% of the shares. For example, if your US assets are $100K, the value of your worldwide assets is $4M and you own a life insurance policy on your life of $3M, your estate would be subject to US estate taxes. US estate taxes can be up to 40%. The percentage of tax as well as the exemption amount of $5.43M can change at any time. For example, in 2009 the exemption amount was $3M and the top tax rate was 45%.
If you are a US citizen or resident alien you are automatically subject to US estate taxes regardless of the fact you may live in Canada. If you own a life insurance policy on your life directly or indirectly, the death benefit increases the value of your estate subject to this tax.
Changing the ownership of life policies on your life to another person who is not subject to US estate taxes or to an Irrevocable Life Insurance Trust (ILIT) are possible solutions, however there may be pitfalls to making these changes if it results in US gift tax. If you think you may be subject to US estate tax, consult your tax professional on ways to mitigate this and avoid possible double taxation caused by conflicting US/Canadian rules.