What happens when you, as a Canadian, make a gift to an American?
 
 Quite a simple question. The answer is also quite simple, but most people get it wrong.
 
 First, assume four things:

  • You (the donor) are a Canadian resident
  • You are not a U.S. citizen or green card holder
  • You are not a U.S. expatriate
  • The gift comes from personal holdings

 
 For Canadian tax purposes, a gift is a fair market value sale. No gain will arise on a gift of Canadian cash. But gains may arise on just about everything else, including a cash gift in U.S. dollars (a foreign currency gain could arise).
 
 The U.S. tax treatment of the gift is straightforward; it is not taxable. But it has to be reported by the donee, on Form 3520, if the aggregate amount of gifts, for the year, is over $100,000 US. The simple failure to report the receipt of the gift can result in a penalty of 25% of the value.
 
 
Now come the complications.
 
 
1: If the subject of the gift is tangible property located in the U.S., the Canadian donor is subject to U.S. gift tax. The annual exemption of $60,000 US does not apply to gifts made by non-resident aliens.
 
 A gift of U.S. real estate is the most common example that leads to trouble. A gift of cash for the purpose of buying U.S. real estate can be treated as if it is a gift of the real estate itself.
 
 
2: The donee takes over the donor’s basis. 
 
 Suppose the gift is 1,000 shares of Apple, worth $200,000. The shares have a tax cost of $50 per share or $50,000 in all.
  
 You will report a gain of $150,000 in Canada. Fair enough! But the recipient takes over your basis of $50,000. This means two capital gains can arise, one in Canada and another in the U.S., on the shares when sold.
  
 Sell the asset, gift the cash, to avoid the potential for double taxation.
  
 
So, a simple question, and a simple direct answer, subject to some possible complications. These issues are easy to avoid once you are aware of the rules.

If you thought the outcome should be similar, it’s not. Done the other way around, the results could not be more different.


First, the donor. You are a U.S. person. You make a gift to a Canadian. The gift is subject to the U.S. gift tax regime. The gift is valued and subject to U.S. tax as follows:

  • Gifts under $18,000 US to any one person ($36,000 US for a married couple), are not taxable gifts. For 2025, the annual gift exclusion is increasing from $18,000 US to $19,000 US ($38,000 US for a married U.S. couple, assuming both spouses are US persons).


  • Gifts above this are taxable gifts. These are reported on a gift tax return. A lifetime exemption (unified with the estate tax) can be claimed (double for a married couple). For 2024, the exemption is $13,610,000 US, which will increase to $13,990,000 US in 2025.


  • In 2025, an individual can gift up to $190,000 US to a non-citizen spouse without being subject to gift tax.


  • Above this, the gift is taxable at graduated rates that progress from 18% to 40%.

 

If the gift is made in kind, and has gone up in value, what happens? The answer is nothing.


 Because the gift falls under the gift tax system, no capital gain arises.


In Canada, the receipt of a gift is not taxable. In addition, no reporting is needed for the gift.


 The tax cost to the Canadian resident recipient is fair market value. This is the case even though no U.S. tax may have been paid.


 The U.S. exemption for gift and estate tax purposes could drop from around $13,610,000 US per individual (double for a U.S. married couple) to around $7 million US come 2026. This could mean that a large amount of exemption is wasted if not used.


2025 may be a very busy year for U.S. estate and gift tax planning.


 Cadesky US Tax advises U.S. clients on a range of tax matters and cross-border situations.


Cadesky US Tax handles a wide range of U.S. tax matters and prepares all common U.S. tax returns (for individuals, partnerships, corporations, and trusts). Contact Dean Smith: [email protected] for more information.
 
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