Many Canadian residents are unaware that they could be subject to U.S. estate tax, even though they are not U.S. citizens. While Canada does not have an estate tax, the United States does—and under certain circumstances, this tax may apply to Canadians. If you are a Canadian resident with U.S.-situated property, it’s crucial to understand the estate tax implications.
When Does the U.S. Estate Tax Apply to Canadians?
For estate tax purposes, Canadian residents who are not U.S. citizens or green card holders are considered non-residents. The U.S. estate tax applies to U.S.-situated assets—such as real property in the U.S., shares in U.S. corporations, and other situs property—owned at the time of death.
If the fair market value of these assets exceeds $60,000 USD, the estate must file a U.S. estate tax return (Form 706-NA). Importantly, this requirement stands even if the total estate is under the basic exclusion amount.
What is the Basic Exclusion Amount for 2025?
In 2025, the basic exclusion amount for U.S. citizens is $13,990,000. However, for Canadian residents, this exemption is prorated based on the ratio of U.S. situs property to the worldwide estate. This is called the prorated unified credit.
Example:
If your worldwide assets total $50 million, and your U.S. real estate is worth $5 million, your exemption is calculated as:
($5M ÷ $50M) × $13,990,000 ≈ $1,399,000
Your taxable estate in the U.S. is then:
$5,000,000 – $1,399,000 = $3,601,000
This amount will be taxed at estate tax rates starting at 18% and climbing up to 40%.
Estate Tax Rates and Liabilities
The estate tax rate is graduated, reaching up to 40% on U.S. assets exceeding the exemption. This can result in substantial estate tax liability. For Canadian residents with valuable U.S. real property, corporations, or mutual funds, the potential estate tax payable can be significant.
How the Canada-U.S. Tax Treaty Helps
Thankfully, the Canada-U.S. tax treaty offers planning opportunities to mitigate double taxation:
- Unified credit: Prorated based on worldwide estate value
- Marital credit: If the surviving spouse is entitled to inherit
- Foreign tax credit: Offsets Canadian tax on the same property
The foreign tax credit and marital credit reduce or eliminate duplicate taxes in both countries.
What Types of Assets Are Subject to U.S. Estate Tax?
Subject to U.S. estate tax:
- U.S. real property (e.g., vacation home)
- Shares of U.S. corporations
- U.S. mutual funds
- Certain tangible personal property
- Some debt obligations
Not subject:
- U.S. bank deposits
- Canadian mutual funds
- Canadian corporations
- Some registered accounts, under specific rules
Fair market value at death is used to determine the taxable estate for estate tax purposes.
What You Need to File
If your U.S. situs property exceeds $60,000, you must file an estate tax return. Even if no estate tax payable results, failure to file may cause penalties or delays in transferring assets.
Filing involves:
- Determining fair market value
- Calculating estate tax liability
- Claiming unified credit amount
- Applying the marital credit or foreign tax credit
- Filing Form 706-NA with the Internal Revenue Service
Planning Ideas to Reduce Exposure
To minimize estate tax exposure, consider these planning ideas:
- Transfer property during life using gift tax allowances
- Hold U.S. assets in a Canadian corporation
- Use a spousal trust to defer estate tax
- Purchase insurance to cover potential estate tax liability
- Diversify away from U.S. situs assets
Engaging in cross-border professional advice is essential to ensure your entire estate is protected and compliant with both Internal Revenue Code and Canada Revenue Agency expectations.
Smart Estate Planning Starts Now
If you’re a Canadian resident who owns U.S. assets, you may be subject to U.S. estate tax. While the tax treaty and unified credit offer relief, you must carefully evaluate your estate tax liability, especially as future tax cuts may expire and exemption thresholds drop.
The best way to manage the tax implications of owning U.S.-situs property is through proactive planning with qualified professionals. With proper structuring, you can protect your legacy, reduce your estate tax, and prevent unnecessary taxes on your worldwide property.
