No one wants to think the unthinkable when planning a trip abroad. But your boomer and snowbird clients should face the possibility that they could die while they are outside Canada, particularly if they are looking for retirement properties in tropical regions or already spending a significant portion of each year in the U.S. or Mexico.

There are steps clients can take now that would make the events immediately following their death in a foreign land manageable for their travelling partners and their families. And those clients who own property abroad can ensure there are no surprises surrounding their estates.

First, make sure your clients have out-of-country medical insurance that includes “repatriation of remains” for all parties. Although this is a standard inclusion in most travel policies, clients who rely on insurance provided by their employers or credit cards should make sure return of remains is covered under these plans. Your clients should also determine whether the maximum benefit will cover the full cost of bringing remains back to Canada. If not, extra coverage should be arranged.

The provision will be a great help for a surviving spouse or travel companion at a terribly stressful time. All he or she has to do is call the assistance number on the policy, says Lawrence Barker, executive director of the Canadian Snowbirds Association in Toronto, and the insurance company takes over.

“The death certificate is issued by the coroner,” Barker says. “The local funeral home prepares the body for transport, prepares all the paperwork and works with the funeral home in Canada. The receiving funeral home picks up the body at the airport. The body flies cargo, and commercial airliners are very discreet about when and where they load and unload a casket. It happens all the time.”

Barker tells of an acquaintance whose mother died while on a Caribbean cruise. “The doctor on board issued the death certificate and the body was literally put into cold storage,” he says. “At the next port of call, it was off-loaded to a local funeral home, which worked with a funeral home back home in Cambridge, Ont.”

Without return-of-remains coverage, a travelling companion would have to find a local coroner, a local funeral home and a funeral home back in Canada. The two businesses would then complete the required paperwork and arrange transportation. The body would have to be prepared for transport in the local funeral home and shipped to Canada.

Minimum cost for preparation (embalming), a basic casket and shipping runs between $5,000 and $7,500. Cremation is a cheaper alternative, costing about $1,000, but security problems may arise when travellers transport cremated remains in urns. The contents could be subject to X-ray examination. The local funeral home will be able to inform the family about the local country’s exit requirements.

Remains can be quickly repatriated when death is the result of natural causes, says the Foreign Affairs and International Trade Canada Web site, www.internation-al.gc.ca. However, it adds: “When death is the result of a crime, a suicide or an accident, repatriation of remains can take much longer.”

In these cases, a police investigation will almost certainly take place. Canadian citizens can call FAIT Canada’s operations centre collect from anywhere in the world at any time at (613) 996-8885.



> The United States

A common language and culture make the U.S. Sunshine states a popular winter vacation destination for Canadians. But you’ll need to remind clients who are considering spending more time south of the border that extended stays and acquiring U.S. real estate can take a big bite out of their finances.

Estate taxes are the biggest nightmare fac-ing the families of Canadians who die while owning property in the U.S. And according to the CSA, 500,000 Canadians own vacation homes in the state of Florida alone.

“It doesn’t matter where your client dies — at home or away on vacation,” says Leonard Glass, a tax lawyer with Lawson Lundell LLP in Vancouver. “It’s where his or her property is located on his or her death that gives rise to tax implications.”

And not only vacation homes are subject to U.S. estate taxes. “It can also take a huge bite out of an estate if a person dies owning U.S.-situated assets, such as shares of U.S. corporations and U.S. business assets,” says Jack Courtney, assistant vice president of advanced financial planning support at Investors Group Inc. in Winnipeg.

@page_break@A foreigner is considered a “resident alien” if he or she passes the “substantial presence test” for the calendar year. To meet this test, your client must be present in the U.S. for at least 31 days during the current year and 183 days during a three-year period that includes the current year and the two previous years. To calculate, you count all the days spent in the U.S. in the current year, one-third of the days in the previous year and one-sixth of the days in the second year previous.

“In general,” Courtney says, “if your client spends less than 120 days in the U.S. in any calendar year, he or she will stay [outside] the U.S. substantial presence test.”

Resident aliens are taxed on their worldwide income and are required to file U.S. personal tax returns each year. “This would put Canadian citizens in a double taxation situation,” Courtney says.

“Non-resident aliens,” on the other hand, are generally taxed only on income from U.S. sources and need only file a U.S. tax return on money they earn in the U.S., such as income from a U.S. vacation home rented out in the off-season.

U.S. estate taxes are based on the fair market value of all U.S. assets on the date of death. For 2008, this will range from a low of 18% on taxable estates less than US$10,000 to a high of 45% on estates of more than US$2 million. U.S. citizens and residents, however, get an estate tax credit that means worldwide estates worth less than US$2 million are exempt from estate taxes.

U.S. tax legislation passed in 2001 has been gradually reducing U.S. estate taxes. Next year, the exemption for U.S. citizens or residents will increase to US$3.5 million from the current US$2 million, so Canadians will also realize a pro-rated benefit in 2009.

U.S. estate taxes are scheduled to disappear in 2010, but the legislation contains a sunset clause that, without further action by the U.S. Congress, will re-establish the taxes under the 2001 rules, which exempt only the first US$1 million from estate taxes. Given the current U.S. fiscal woes, some tax experts, including Courtney, think the U.S. can’t afford to abolish estate taxes.

The U.S. imposes gift taxes at the same rate as estate taxes. “So, your client can’t get out of paying estate taxes,” Courtney says, “by giving his U.S. property away before he or she dies.”

One solution is for your client to sell the property while he or she is alive. The long-term capital gains rate in the U.S. on property held for more than one year is 15%, plus state taxes.

But because death doesn’t always come with a warning, you can arrange to have a Canadian personal trust set up, structured to keep the property out of the client’s estate. The client can use the property during his or her lifetime, but on death it goes to the children. But, Courtney points out, the person who is funding the trust — that is, your client — can’t have control over the trust or benefit from it.

Such an arrangement depends largely on family dynamics. “So, I’m going to the condo in Florida as the guest of my children,” Courtney says, hypothetically. “I’d better have a good relationship with them.”

Before getting into high-end trusts, your client should find out what estate taxes would be due on the property. “The typical Canadian snowbird spends about US$400,000 on a U.S. property,” says Lyle Moline, a partner at Meyers Norris Penny LLP in Calgary and a specialist in international taxation. “If the estate taxes would be only about $50,000, buying life insurance to enable the spouse or children to pay the estate taxes, and then keep or sell the property, will probably be cheaper in the long run.”

But in order to avoid paying estate taxes a second time when the second spouse dies, Courtney suggests the client can arrange for the lower net-worth spouse to purchase the U.S. property in the first place. “If that spouse is the first to die, there will probably be little taxes on the estate,” he says.

Another strategy, Courtney says, may be “gifting” your client’s Canadian assets to the spouse — there are no gift taxes in Canada — to lower your client’s worldwide assets.



> Mexico

More than a million Canadians visit Mexico every year, and the land of sombreros and mariachi is also growing in popularity as a Canadian snowbird destination.

Mexico has its own set of rules for visitors and foreign nationals who own property there.

Renting is often preferable to buying real estate in Mexico, says Vancouver-based lawyer Douglas Gray, author of The Canadian Snowbird Guide (2008, John Wiley & Sons Canada Ltd., $26.99): “You can rent an oceanfront villa for about $600 a month,” he says. “So, why bother owning? The downside is greater than the upside.”

Some consider Mexican real estate a good investment, but there are restrictions on property non-Mexicans can buy. “Foreigners cannot hold title to property within 50 kilometres of any coastline,” Gray notes. “But the Mexican Congress has implemented a system whereby Mexican banks acquire a property and place it in trust for the ‘sole use and enjoyment’ of the beneficiary. This includes the right to resell the property at fair market value.”

A reliable lawyer is necessary when buying property in Mexico, he adds: “You’ll also require the services of a notary. The Canadian Embassy in Mexico can provide names of reputable real estate agents, lawyers and notaries. And with property laws in Mexico continually changing, you should set up a maximum fee agreement at the outset.”

Unlike the U.S., Mexico doesn’t look at the number of days your client spends in the country to determine residency for tax purposes. “Instead, residency is established if a foreigner has an established home in Mexico,” says Lori Lui, senior manager of tax and human resources services at PricewaterhouseCoopers LLP in Vancouver. “But property for recreational purposes is not considered a home.”

However, if your client has homes in both Mexico and Canada, and earns more than 50% of his or her income in Mexico, that person will be considered a resident of Mexico, Lui says. This would apply to Canadians who work in Mexico for a Canadian company, for example.

Under the Canada/Mexico tax treaty’s tiebreaker rule, if your client can establish that his or her ties to Canada are stronger than those to Mexico — such as having a permanent home in Canada, along with club memberships and bank accounts — that person won’t be considered a resident of Mexico.

“So, advise your client to maintain these ties,” Lui says.

There will be a 25% withholding tax on the sale price of your client’s Mexican property “or a 28% tax on the capital gains, which makes more sense for the seller,” Lui says. “Your client will have to file a tax return in Mexico for the capital gains, although for Canadians who have permanently moved to Mexico, there’s an exemption for principal residency.”

If your client rents out a home in Mexico, Lui says, there is a 25% withholding tax on gross rental income, or a 28% withholding tax on net rental income. “The latter option,” she says, “takes into account your client’s property expenses.”

Mexico has no estate or inheritance taxes. But, Lui notes, the heir to your client’s Mexican property will take over its original cost base. “This form of deferred taxation,” she says, “will see the heir taxed on the capital gains [relative to] the original purchase price when the property is sold.”

There are no gift taxes on properties gifted to linear descendents (children or grandchildren), she adds: “But there is a tax of 25% of the market value of property that is gifted sideways [to siblings, nephews, nieces, etc.] or to non-relatives.”

Gray recommends medical insurance with worldwide coverage that includes Mexico. “This would cover your client while driving through the U.S.,” he says, “or if the airplane makes a U.S. stopover.”

Again, the insurance should have repatriation-of-remains coverage. Your client should make sure air ambulance service is covered, Gray adds: “And your client should determine whether the insurer has a relationship with a hospital in the area in which he’ll be staying, and whether that hospital has English-speaking staff to reduce the risk of medical problems arising from poor communication.”

Some Canadians planning longer vacations can purchase supplemental insurance policies at local private medical clinics, Gray says.



> Other Destinations

The greater the distance your clients travel from Canada and the less developed the vacation destination, the more challenges they will face, according to Gray. He suggests clients consider safety factors such as crime rates and political stability, and learn about local attitudes toward foreigners and about the rights and obligations clients hold in the country as a foreigner.

Travel insurance generally covers the return of remains from anywhere in the world. Of course, if a client is on an adventure trek in the middle of nowhere when he or she dies, there may not be a funeral home nearby.

If your client’s trip is arranged by a tour company, that firm would be responsible for arranging things. However, this may be expensive if the client has to include exotic transportation such as helicopters for retrieving the remains, as well as refrigeration, airfare and other services.

So, clients should check to determine whether the maximum benefit under the policy will cover the full cost of bringing remains back to Canada from the clients’ vacation destination and, if it doesn’t, they should arrange for extra coverage.

Although medical insurance will cover the cost of medical services, clients with health problems should also consider the quality of the medical services available at the vacation destination.

Clients may also want to check the regulations about foreign property ownership, tax issues, their obligations when renting a property and how to rent out a vacation home.

“Your clients can contact the Canadian consulate closest to where he or she is considering buying a vacation property,” Gray says, “and ask for feedback on the issues they’ll need to deal with.” IE