Most Canadians don't think about US estate tax. They probably should. A Canadian who owns a Florida condo, US-corporation shares in a brokerage account, or tangible personal property kept at a US residence is exposed to US federal estate tax at death — even with no other US connection.
The rule
The United States imposes federal estate tax on:
- The worldwide assets of US citizens and US residents at death (at rates up to 40%, with a unified credit currently sheltering up to roughly US$13.6 million per individual — set to drop substantially after 2025).
- The US-situs assets of non-resident aliens at death (at the same 40% top rate, but with a default unified credit sheltering only US$60,000).
For Canadians without other US connections, the relevant rule is the second one. The default US$60,000 exemption would expose most snowbird condo owners to substantial tax — but the Canada-US Income Tax Convention rewrites that exemption.
The treaty's prorated unified credit
Article XXIX-B of the Canada-US treaty provides that a Canadian non-resident alien at death is entitled to a prorated share of the full US unified credit. The credit is calculated as: (Full US unified credit) × (US-situs gross estate ÷ worldwide gross estate). For a Canadian whose worldwide estate is well within the full US exemption threshold, the prorated credit fully shelters the US-situs assets and no US estate tax is owed.
For a Canadian whose worldwide estate exceeds the US exemption, the credit shelters only a fraction of the US-situs assets, and the remainder is taxed. For example: if your worldwide estate is US$25 million and your US-situs assets total US$1 million, the prorated credit is the full US credit × (1/25) = roughly US$544,000. Without other reductions, that's substantially less than the US estate tax on US$1 million of US property, and some tax is owed.
The treaty also provides additional credits (the spousal credit on transfers to a spouse, the charitable credit) that further reduce the exposure in specific cases.
What counts as US-situs
The main categories of US-situs property are:
- US real estate — the Florida condo, the Arizona patio home, the Manhattan apartment.
- Shares of US corporations — regardless of where the certificates are held. A Canadian brokerage account holding 1,000 shares of Apple Inc. holds US-situs property.
- Tangible personal property physically located in the US — vehicles at the snowbird residence, art at a US gallery on consignment, jewellery in a US safe-deposit box.
- Debts of US obligors, with exceptions for portfolio-interest-eligible debt and certain bank deposits.
Notably NOT US-situs: deposits in US banks held in the ordinary course by non-residents, life insurance on the life of a non-US-citizen non-resident, and shares of non-US corporations that happen to hold US assets.
Planning levers
For Canadians with material US-situs exposure, the standard playbook is:
- Hold US real estate through a Canadian corporation. The deceased's gross estate then contains shares of a Canadian corporation (not US-situs) instead of US real estate. The trade-off is the imputed-rent issue under Section 15 of the Canadian Income Tax Act when the shareholder uses the property personally — addressed through arm's-length rental arrangements.
- Hold US real estate through a partnership. A partnership interest's situs is fact-dependent; a properly-structured partnership can avoid US-situs treatment without triggering Section 15. The structure must have substance.
- Use a cross-border irrevocable trust. Property contributed during life to an irrevocable trust over which the contributor has not retained estate-tax-relevant powers escapes the gross estate. The structure must respect both Canadian and US trust rules.
- Move US-corporation share holdings to non-US-corporation alternatives. Where the goal is exposure to a US index, holding through a Canadian-listed ETF that tracks the index removes the US-situs question entirely.
- Fund the projected tax with life insurance. Term insurance on the property owner's life — owned by an irrevocable trust or by a third party to keep it out of the gross estate — funds the projected estate-tax bill if pre-mortem restructuring is impractical.
Filing — Form 706-NA
Where US estate tax may apply, the executor must file Form 706-NA within nine months of death (with a six-month extension on Form 4768). The treaty credit must be claimed on the return; the IRS's position is that the treaty benefit is conditional on a timely claim. Even where the credit fully eliminates the cash tax, a protective filing preserves the credit and starts the limitations clock.
The 2025/2026 sunset
The current US estate-tax exemption is set to drop by roughly half after 2025 under existing law (the 2017 Tax Cuts and Jobs Act provisions sunset). Canadians whose planning is built around the current exemption should review the analysis under the lower thresholds before the sunset takes effect.
The bottom line
US estate tax is the most-overlooked tax exposure for affluent Canadians. The risk surface scales with both worldwide estate value and US-situs concentration. For estates with material US-situs holdings, a structural review every five years (and certainly before any major estate-planning revision) is appropriate.