Almost every Canadian business has some connection to the U.S., whether through existing or potential customers or suppliers, or something as simple as U.S. investments held in a portfolio.
One tax planning consideration that is often overlooked is the impact of U.S. estate tax. Most Canadians think these taxes don’t apply to them, but this is a false assumption. A tax rate of as much as 40% applies to all non-U.S. residents holding as little as $60,000 in U.S. assets—including U.S. real estate, U.S. stocks, or loans made to U.S. persons.
U.S. Estate Tax
The U.S. imposes an estate tax for U.S. citizens and residents on transfers of property—wherever located—made at death by any deceased person. For “non-resident aliens” (essentially any person who is not a U.S. citizen or resident) the U.S. estate tax only applies to the portion of their assets that are ‘U.S. situs assets’.
These ‘U.S. situs assets’ include:
- U.S. real estate, including condominiums, co-operatives, and time shares;
- Household goods and other property located in the U.S., including furniture, artwork, cars and boats;
- U.S. issued stocks, mutual fund units, and money market units;
- U.S. pension plans;
- Debts issued by US person or entities, or debt secured against U.S. property such as vendor take-back mortgages on sales of U.S. real estate;
- U.S. issued stocks held in alter ego trust, RRSP, RRIF, TFSA.
U.S. citizens have a lifetime exemption of $13.61 million USD on their ‘worldwide estate’ for the 2024 tax year. Luckily, Canadians can also use this exemption* to reduce their U.S. estate taxes as per the Canada-U.S. Tax Treaty. This exemption gets prorated based on the U.S. situs assets.
*Note: U.S. tax filings are required in order to claim the exemption.
A ‘worldwide estate’ includes:
- All U.S. situs assets;
- All other property owned by deceased (wherever situated, irrelevant to whom it will be passed to on death, either through estate or through joint ownership or beneficiary designation);
- Life insurance if the deceased was the owner of the policy or insurance is paid to deceased’s estate;
- RRSPs, RRIFs & TFSAs;
- Property held in trust for the individual in alter ego trust, joint spousal or common law partner trust, bare trust, revocable trust and any other trust where the beneficiary has a general power of appointment.
A Canadian resident may be subject to U.S. estate tax on U.S. situs assets when the total value of these assets is over $60,000 USD and when the value of their worldwide estate is over the lifetime exemption.
It is important to note that the $13.61 million exemption is set to decrease to approximately $6 million as of Jan 2026.
Unified Credit
Under the Canada-U.S. Tax Treaty, the Unified Credit is available to reduce the resulting tax liability of U.S. estate tax. A Unified Tax credit of $5,389,800 USD effectively shelters $13.61 million USD of taxable estate.Canadians are also eligible to apply this credit against tentative U.S. estate tax liability, but the credit must be prorated based on the ratio of U.S. assets to the Worldwide estate:
U.S. Situs Assets/ Worldwide Estate x Unified Credit = Prorated unified credit (for U.S. situs assets)
Example
A Canadian resident owns a home in Florida worth $2.10 million USD. The gross value of their worldwide estate at the time of death in 2024 was $14.05 million USD. This means that their estate is in excess of $440,000 USD after claiming the lifetime exemption of $13.61 USD million.
At the appropriate tax tier, their estate would pay $785,800 USD on their $2.1 million home before the unified credit.
Their U.S. assets constitute 15% of their worldwide estate ($2.1 million/$14.05 million). As such, they are entitled to claim a Unified Credit of approximately $800,000 USD (15% of $ 5,389,800) on their U.S. estate tax return.
Their estate will pay zero estate taxes because their unified credit of $800,000 USD is sufficient to eliminate the $785,800 estate tax liability.
Note: In order to claim the credit, U.S. filings need to be done on a timely basis.
Example with 2026 Exemption
Using the same house and worldwide estate values but using 2026 as the year of death, their estate would be in excess of $8.05 million after claiming the decreased lifetime exemption of $6 million USD and the estate would pay $785,800 USD on the $2.1 million home before the unified credit at the appropriate tax tier.
U.S. assets still constitute 15% of their worldwide estate ($2.1 million/$14.05 million). A Unified Tax credit of $2,345,800 USD effectively shelters $6 million USD of taxable estate. As such, they are entitled to claim a Unified Credit of approximately $350,000 USD (15% of $2,345,800.00) on their US estate tax return. In this example, the estate will pay $435,000 USD in estate taxes, as the Unified Credit of $350,000 USD is insufficient to eliminate his estate tax liability.
Joint Tenancy and Double U.S. estate inclusion.
Joint tenancy makes it more difficult to defer the U.S. estate tax until the death of the survivor. Where the surviving joint tenant is someone other than a U.S. citizen spouse, the entire value of the property is included in the estate of the first to die, unless it can be demonstrated what value the surviving joint tenant contributed toward the property (the “tracing rule”). The entire property passes by operation of law to the surviving spouse, where the entire value will be again be subject to U.S. estate tax at the survivor’s death.
If you are married, proper planning is essential to prevent your U.S. property from being subject double U.S. estate tax. Tenancy in Common—with each spouse owning half (50%) of the property—is usually a preferred approach.
Structures to Help Protect Canadians from the U.S. Estate Tax
There are several ways to own U.S. property that effectively prevent the application of the U.S. estate tax.
The U.S. estate tax applies at the death of the owner, and since legal entities continue after a shareholder’s death, the estate tax would not apply. The key is choosing the right one. Some options are a Canadian corporation, Canadian partnership, hybrid Canadian partnership and a Trust. Each has its advantages and disadvantages that should be discussed with a cross-border tax specialist to determine which is most appropriate for your specific situation.
In our experience, one of the most effective planning tools to avoid the inclusion of the U.S. real property in either spouse’s estate for U.S. estate tax purposes is an Irrevocable Trust.
Irrevocable Trust
An Irrevocable Trust involves an individual (“Grantor”) establishing a trust and then contributing funds to the trust to purchase the U.S. situs real property.
The Grantor’s spouse and their heirs are named as the beneficiaries, and can use the property rent-free during their lifetimes. The Grantor’s spouse can be the trustee as long as distributions of income and capital are limited by ascertainable standard (health, support, maintenance or education), and the Grantor is permitted to use the property rent-free during their spouse’s lifetime.
Note: The Grantor must not be a beneficiary or a trustee of the trust.
If all the above requirements met, upon the Grantor’s death, the property held in the trust will not be a part of the estate for U.S. estate tax purposes. The same will be true on the death of the grantor’s spouse, even if they are a trustee, as long as the distributions from the trust are limited by an ascertainable standard.
Added benefits of an Irrevocable Trust include avoiding probate, protecting the property held in the trust from creditor claims, and potentially allowing the U.S. long-term capital gains rate (20%) to be available on a sale if the property is held for more than one year.
Minor drawbacks of establishing an irrevocable trust include:
- if the Grantor’s spouse predeceases the grantor, the grantor will have to pay fair market rent to continue to use the property.
- If the Grantor and his or her spouse divorce, then the spouse can continue to use the property to the exclusion of the Grantor,
- The Grantor loses control of the property,
- Property held in a Canadian trust is deemed to be sold every 21 years.
S+C Partners is here to help.
U.S. Tax rules are complex, and we recommend consulting with a cross-border tax specialist to create a cross-border tax plan if you believe that you or your estate may be caught under U.S. Estate rules.
Our dedicated cross-border tax team and fully qualified and experienced Trust and Estate Practitioners are here to assist you. Please call us at 905-821-9215 or email us at info@scpllp.com if you have any questions or require any assistance regarding U.S. Estate Tax.
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S+C Partners is a full-service firm of Chartered Professional Accountants, tax specialists, and business advisors with in-house expertise that extends well beyond traditional CPA services. In addition to audit, accounting, and Canadian tax services, we also offer business advisory services, comprehensive IT solutions, Human Resource consulting, and in-house expertise within highly focused areas such as US taxation, business valuations, and estate planning. We provide all the technical expertise of a large CPA firm, but with the personal touch and partner-level attention of a boutique accounting and advisory firm.