ADDING A FAMILY MEMBER TO REAL PROPERTY TITLE: CANADIAN AND U.S. TAX RISKS TO CONSIDER

Adding a family member to the title (beneficial and legal) of real property, especially U.S.-situated property owned by Canadian residents, can trigger complex Canadian and U.S. tax consequences, including gift tax liabilities that may extend beyond the donor’s lifetime.

Adding a child or other family member to title to real property can have significant Canadian and U.S. tax consequences, even where no money changes hands. For Canadian income tax purposes, a transfer of beneficial ownership may result in a deemed disposition at fair market value under the Income Tax Act. Under the Income Tax Act because a parent and child generally deal at non-arm’s length, the parent may be treated as having disposed of the transferred interest for proceeds equal to its fair market value. In Dyjack v. Shaw, 2025 ONSC 1937 the Ontario Superior Court of Justice focused on the U.S. gift tax liability that arose when an adult daughter was added to title to a Florida property. The decision did not address any Canadian income tax consequences. For U.S. purposes, the addition of a child to title to U.S.-situated property may trigger gift tax, even where the transferor is a Canadian tax resident who owns the property as a Florida snowbird. U.S.-situated assets, including real property, vehicles and artwork, should therefore be reviewed carefully. State-level gift, estate or probate tax may also need to be considered depending on where the asset is located and how it passes on death.

Background

Carolyn Alexander, a Canadian tax resident, passed away on June 28, 2021, leaving two daughters, Carrie Lynn Dyjack and Kelly Lynn Shaw. Under her Will dated January 9, 2013, both daughters were appointed as co-executors and were to share equally in the residue of the estate. During the estate administration, they learned that Ms. Alexander had previously transferred a Florida property from her sole name into joint tenancy with Ms. Dyjack by quit claim deed dated March 2, 2009.

For U.S. tax purposes, the 2009 transfer was treated as a completed gift that should have been reported at the time. No gift tax return was filed. A late return was later prepared and filed during the estate administration, and the IRS assessed gift tax, penalties and interest totalling US$70,791.45. Ms. Dyjack paid that amount, together with related U.S. accounting and appraisal costs, personally. She then asked Ms. Shaw to agree that the estate should bear the cost. Ms. Shaw refused, and Ms. Dyjack applied to the Court for advice and direction regarding the estate.

U.S. Gift Tax Overview

For U.S. federal tax purposes, adding a child to the deed of U.S. real property can be a completed gift when the deed is executed, because the child receives a present ownership interest. The transferor is generally required to file IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. In 2009, the annual exclusion was US$13,000. Unlike the U.S. estate tax rules, the Canada–U.S. Tax Treaty does not provide comparable relief from U.S. gift tax for a Canadian resident who gifts an interest in U.S.-situated property. The U.S. gift tax is imposed under the rate structure in IRC section 2001(c), with marginal rates rising from 18% to 40%.

Because Ms. Alexander did not file Form 709 in 2009 when she added Ms. Dyjack to title to the Florida property, the normal limitation period did not begin to run. Under IRC section 6501(c)(9), the IRS may assess gift tax at any time where a gift is not adequately disclosed. As a result, the unpaid gift tax remained assessable after Ms. Alexander’s death. Although the donor is primarily liable for gift tax, that liability can expose both the donor’s estate and the donee.

In addition, the estate trustees may face personal exposure in certain circumstances, including under 31 U.S.C. section 3713(b). The practical point is that an unreported lifetime gift of U.S.-situated property can create tax exposure that continues well beyond the donor’s death.

Discussion

The Revenue Rule

The revenue rule is a common law principle under which Canadian courts generally will not enforce, directly or indirectly, the tax laws of another country. The principle has long been recognized in cases such as Government of India, Ministry of Finance (Revenue Division) v. Taylor, [1955] A.C. 491, and United States v. Harden, [1963] S.C.R. 366, where the Supreme Court of Canada refused to enforce a foreign tax judgment against a Canadian resident. The rule may, however, be modified by treaty or legislation where Canada has expressly agreed to assist in the collection of another country’s revenue claims.

Review of the revenue rule

Under common law, a court will not enforce, directly or indirectly, the revenue laws of a foreign state. The rule was established in the landmark English High Court case the King of the Hellenes v. Brostrom and Others (1923) 16 Ll. L. Rep. 190) and the House of Lords’ decision in Government of India, Ministry of Finance (Revenue Division) v. Taylor (1955, A.C. 491) and applied in the Supreme Court of Canada case United States v. Harden ([1963] S.C.R. 366) where the Supreme Court of Canada refused to enforce a California tax judgment against a Canadian resident. The Supreme Court of Canada repeated at page 370 of its decision the famous proposition cited in Government of India, Ministry of Finance (Revenue Division) v. Taylor “that in no circumstances will the courts directly or indirectly enforce the revenue laws of another country”. This was modified by the Federal Court in Hillis v. Canada, 2015 FC 1082 which the addition unless expressly allowed to do so in the home country of the person in question.

Canada and the United States have partially displaced the revenue rule through Article XXVI A of the Canada–U.S. Tax Convention, which provides for assistance in collecting certain finally determined revenue claims. That assistance can extend to categories of taxes that include gift tax. However, the treaty also contains limits. In particular, assistance may be unavailable where the claim relates to a taxable period during which the taxpayer was a citizen of the requested state. The important point for Canadian clients is that the revenue rule may protect against direct enforcement of a foreign tax claim in Canada, but it does not protect U.S.-situated assets from the IRS’s domestic collection powers.

In Dyjack v. Shaw, the revenue rule did not determine the result because the IRS was not asking a Canadian court to enforce a U.S. tax claim. Instead, Ms. Dyjack was seeking reimbursement from the estate after paying the U.S. gift tax herself. The question was therefore an estate administration question: whether the liability was one that should be borne by the estate as between the beneficiaries.

Re Fudger, 1984 CarswellOnt 566, 18 E.T.R. 12 (Ont. H.C.J.), is useful by contrast. In that case, Hannah Lake Fudger had separate Canadian and Scottish estates governed by separate instruments. Her Ontario Will applied only to her Canadian property, while her Scottish deeds of settlement applied only to her Scottish property.

After Ms. Fudger’s death, the U.K. tax authority asserted a capital transfer tax claim based on the position that she was deemed domiciled in the United Kingdom. The claim potentially reached both her Scottish and Canadian assets. The question for the Ontario court was whether the tax-payment clause in her Canadian will required the Canadian executor to pay that U.K. tax from the Canadian estate.

The court held that it did not. In reaching that conclusion, the court emphasized the wording of the Canadian will. The clause directed the executor to pay taxes payable “in connection with any property passing under this my will.” Because the will was expressly limited to Canadian property, the court read the tax clause as applying only to taxes connected with the Canadian estate. It was not broad enough to shift responsibility for U.K. tax to the Canadian beneficiaries.

The court also relied on the revenue rule. Canadian courts will generally not enforce the tax laws of another country, either directly or indirectly. Requiring the Canadian executor to satisfy the U.K. tax claim through the Canadian estate would have amounted to indirect enforcement of a foreign revenue claim. That provided a separate reason not to require payment from the Canadian estate.

In Dyjack, the issue was not whether the IRS could enforce a U.S. tax claim in a Canadian court. Instead, the question was whether the unpaid U.S. gift tax, arising from a lifetime transfer, was an obligation that should be borne by the estate as between the beneficiaries. That is why the revenue rule did not determine the outcome in Dyjack.

The Canadian Decision

The Ontario Superior Court of Justice held that the U.S. gift tax was a proper liability of the estate. The Court accepted that, if the tax had remained unpaid, both estate trustees could have faced continuing exposure. The Court also found that Ms. Shaw had not shown that Ms. Alexander intended Ms. Dyjack alone to bear the gift tax burden. Although the Will referred to transferring any Florida property interest to Ms. Dyjack, the Court held that the Florida property itself passed outside the Will by right of survivorship. There was also no evidence of Ms. Alexander’s actual intention regarding the tax consequences of the 2009 transfer.

The Court preferred the evidence that the IRS had broader collection tools than the objecting side acknowledged — including pursuing the estate trustees personally for up to ten years. Leaving the tax unpaid would have exposed both daughters personally, so paying it was neither gratuitous nor unnecessary, and gave rise to a claim for indemnity against the estate.

Take Away

For clients administering an estate with U.S.-connected assets, Dyjack v. Shaw is an important reminder that a foreign tax liability personally owed by the deceased may be treated as a legitimate debt of a Canadian estate. This may be the case even where the tax was not reported during the deceased’s lifetime and even where the immediate collection issue arises only after death. The analysis focuses on the nature of the liability, the estate trustees’ exposure, and whether payment was reasonably necessary in the circumstances.

Two practical lessons stand out. First, the form of ownership matters. Because the Florida property passed by survivorship, the Will’s wording about the Florida property did not determine who bore the tax cost. Jointly held assets and beneficiary-designated assets often pass outside the estate and should be reviewed separately from the Will. Second, estate trustees and beneficiaries should obtain and preserve advice before paying a foreign tax liability. Where the payment is made to protect the estate and its representatives from genuine exposure, reimbursement from the estate may be appropriate.