US Estate Tax for Canadians

Most Canadians assume US estate tax is an American problem. It is not. The United States imposes its federal estate tax on the US-situs assets of non-resident, non-citizen decedents — meaning a Canadian who never lived a day in the US, never held a green card, and filed only Canadian returns can still leave behind a US estate-tax liability simply by owning a Florida condo, an Arizona vacation home, or shares of US-listed corporations at death. The tax is assessed on fair market value, not gain, and the highest marginal rate is 40%. The Canada-US Income Tax Convention softens the blow for most families, but the relief is conditional, the math is proportional, and the trap usually springs at exactly the moment no one is positioned to fix it: after death.

This page explains how US estate tax reaches Canadian residents, what the treaty does and does not do, how the Canada side and US side interact, the planning levers available while you are alive, and the filings an executor faces when exposure exists. It reflects US law as amended by the 2025 budget legislation, which changed the planning landscape in a way that catches many Canadians off guard.

The rule in one paragraph

The US taxes the worldwide estates of its citizens and residents, and the US-situs estates of everyone else. Under domestic US law, a non-resident non-citizen receives a unified credit of only US$13,000 — enough to shelter the first US$60,000 of US-situs assets and no more. That figure is not indexed to inflation and has not moved in decades. For most Canadians it is largely irrelevant, because Article XXIX-B of the Canada-US tax treaty replaces the meagre US$60,000 shelter with a prorated share of the much larger US unified credit available to American citizens. The prorated credit equals the full US credit multiplied by the ratio of US-situs assets to the worldwide estate. The smaller your US holdings are relative to your total estate, the smaller the slice of the credit you receive — but for a Canadian whose US property is a modest fraction of a modest estate, that slice is usually enough to wipe out the tax.

The 2025 law change Canadians need to know

For years, cross-border planners warned clients about a scheduled "sunset": the temporarily doubled US estate-tax exemption from the 2017 Tax Cuts and Jobs Act was set to fall by roughly half at the end of 2025. That sunset did not happen. The 2025 federal budget legislation (the "One Big Beautiful Bill Act," signed July 4, 2025) made the higher exemption permanent and raised it again. As of 2026 the US basic exclusion amount — the worldwide figure the citizen-equivalent unified credit shelters — is US$15 million per person, with annual inflation indexing beginning in 2027. The highest estate-tax rate remains 40%.

This matters because the treaty's prorated credit is calculated off that US$15 million figure. A larger US exemption means a more generous prorated credit for Canadians. In practical terms, a Canadian whose worldwide estate is below roughly US$15 million will, in many cases, find that the treaty's prorated unified credit eliminates the actual US estate tax — even though US property sits in the estate. The exposure becomes a live concern when the worldwide estate climbs past that threshold, when the US-situs share is large relative to the whole, or when older planning was built around a sunset that never arrived. If you restructured in 2024 or 2025 to beat the sunset, that planning deserves a fresh look under the rules as they now stand.

What counts as US-situs property

Situs — the legal location of an asset for estate-tax purposes — is the whole game. Get the situs wrong and you either over-report or, worse, miss an exposure. The principal categories of US-situs property for a non-resident non-citizen are:

• Real property located in the United States. The Florida or Arizona condo, the Palm Springs house, raw land, and a Canadian's undivided interest in US real estate all count, valued at full fair market value regardless of any mortgage that is non-recourse.
• Shares of US corporations — meaning any company incorporated in a US state — regardless of where the share certificates physically sit, where the brokerage account is held, or whether the shares trade on a Canadian exchange. A Canadian who holds Apple, Microsoft, or a private US operating company through a Canadian brokerage still holds US-situs stock.
• Tangible personal property physically located in the US: vehicles kept at the snowbird residence, artwork on a US wall, jewellery in a US safe-deposit box, a boat moored in Florida.
• Certain debt obligations of US persons, where the portfolio-interest and bank-deposit exceptions do not apply.

Equally important is what is not US-situs and therefore escapes the tax. Cash on deposit with a US bank held by a non-resident in the ordinary course is excluded. Debt that qualifies for the portfolio-interest exemption is excluded. Proceeds of life insurance on the life of a non-resident non-citizen are not US-situs even when paid by a US insurer. And — a frequent point of confusion — shares of a Canadian corporation are not US-situs even if that corporation's only asset is US real estate. That single distinction sits at the heart of much cross-border estate planning.

How the Canada side treats the same death

The US estate tax does not operate in a vacuum. Canada has no estate tax, but it imposes a deemed disposition on death under the Income Tax Act: with limited exceptions (notably a spousal rollover), a deceased Canadian is treated as having sold all capital property at fair market value immediately before death, triggering capital-gains tax on the terminal T1 return. US real estate and US securities are caught by this deemed disposition just like Canadian assets. The result is that the same US property can be taxed twice on the same death — once by the US as an estate-tax item on full value, and once by Canada as a deemed-disposition gain.

The treaty contains the mechanism that prevents true double taxation. Canada generally allows a foreign tax credit for US estate tax paid, credited against the Canadian tax arising on the same US property on the same death. The credit is not automatic and not unlimited — it is constrained by the Canadian tax actually payable on that property — but where it applies, it converts what looks like double tax into a single, coordinated burden. Capturing it requires the US estate-tax return and the Canadian terminal return to be prepared with each other in view. This is also why the Canada-side analysis on a cross-border death cannot be separated from the US-side analysis; the two returns share figures.

The treaty's marital credit and other reliefs

Article XXIX-B does more than prorate the unified credit. Two additional reliefs are worth naming:

• The treaty marital credit. The US marital deduction that lets a citizen leave assets to a spouse free of estate tax is denied where the surviving spouse is not a US citizen — the concern being that the untaxed assets would later leave the US tax net. The treaty restores a measure of relief by granting a special marital credit when US property passes to a surviving spouse, broadly equal to the lesser of the estate's prorated unified credit and the US estate tax otherwise owing. In effect it can double the shelter available to a married couple's first death, deferring exposure to the survivor's estate.
• Small-estate relief. The treaty also coordinates so that Canadians with small worldwide estates are not pushed into US estate tax purely by the low domestic US$60,000 threshold. The prorated credit and the treaty's framework are what make the difference between the harsh domestic rule and a workable result for ordinary snowbird families.

None of these reliefs is self-executing. Each depends on a complete and timely US filing and, in some cases, on a treaty-based return position being properly disclosed.

Planning levers while you are alive

The cleanest exposure is the one defused before death. The standard cross-border playbook includes:

• Hold US real estate through a Canadian corporation. If a Canadian corporation owns the US property, the decedent's estate contains shares of a Canadian company — which are not US-situs — rather than US real estate. The structure removes the asset from the US gross estate, but it carries trade-offs: a shareholder-benefit (imputed-rent) issue under section 15 of the Canadian Income Tax Act where the property is used personally, ongoing corporate compliance in both countries, and loss of the lower individual capital-gains treatment on a later sale. It tends to suit investment property better than a personal vacation home.
• Hold US real estate through a partnership or limited partnership. The situs of a partnership interest is unsettled in US law, and a properly formed and respected partnership can, in the right facts, take the underlying US real estate out of the US estate without the section 15 imputed-rent problem. The structure must be genuine — capitalized, documented, and operated as a partnership — not a paper label over personal use.
• Use a cross-border irrevocable trust. Property contributed during life to an irrevocable trust, over which the contributor retains no estate-tax-relevant powers of control or enjoyment, is excluded from the gross estate. Trust planning must respect both the US estate-tax grantor-trust rules and the Canadian 21-year deemed-disposition and attribution rules — a structure that works on one side can backfire on the other if drafted in isolation.
• Fund the exposure with life insurance. Where restructuring is impractical — an elderly owner, a long-held home, a property the family will not give up — life insurance on the owner's life, owned by an irrevocable trust or a third party so the proceeds stay outside the gross estate, provides liquidity to pay the projected US estate tax without forcing a distressed sale.
• Right-size US-situs holdings. Sometimes the simplest lever is composition: holding US-market exposure through Canadian-domiciled ETFs or funds rather than US-incorporated securities can reduce US-situs stock in the estate while keeping the same market exposure.

Each lever moves Canadian tax, US tax, control, and cost in different directions. The right answer for a US$400,000 Florida condo held by a retired couple is rarely the right answer for a US$6 million US securities portfolio held by a business owner.

Common traps

• Assuming "no US tax filings" means "no US estate tax." Estate tax turns on situs and value at death, not on whether the decedent ever filed a US income-tax return.
• Counting US securities as Canadian because the account is Canadian. The brokerage's location is irrelevant; what matters is where each issuer is incorporated.
• Banking on a sunset that was repealed. Planning built around the 2025 exemption drop now sits on a foundation that no longer exists. The exemption rose; it did not fall.
• Forgetting the non-citizen spouse. Leaving US property outright to a non-US-citizen spouse forfeits the US marital deduction; the treaty marital credit helps, but only if claimed.
• Letting the US and Canadian returns be prepared by separate hands. The Canadian foreign tax credit for US estate tax depends on the two returns sharing consistent figures.
• US-citizen children and beneficiaries. A Canadian estate with American children, or with assets passing into US trusts, layers US transfer-tax and reporting issues onto an otherwise Canadian plan.

Form 706-NA and protective filings

Where a Canadian dies owning US-situs property above the filing threshold, the executor must file Form 706-NA (United States Estate Tax Return for non-resident non-citizens) within nine months of death, with a six-month extension available on Form 4768. The return reports US-situs assets, claims the treaty's prorated unified credit and any marital credit, and computes the tax. The treaty benefits are claimed on the return — they are not granted by default — and the IRS's position is that the prorated credit is conditional on a complete and timely filing that discloses the worldwide estate. For that reason a protective Form 706-NA is often advisable even where the prorated credit is expected to reduce the cash tax to zero: filing preserves the credit and starts the limitation clock, while not filing risks the IRS asserting the bare US$60,000 domestic shelter. Where US real estate must be sold or retitled, a federal estate-tax transfer certificate (Form 5173) is frequently required before a US title company or transfer agent will release the asset to the heirs.

How Barrett Tax Law approaches US estate tax for Canadians

For living clients, we model the projected US estate-tax exposure under current law — including the 2026 US$15 million exemption and the treaty's prorated credit — alongside the Canadian deemed-disposition cost, and we set out the restructuring options that target the lowest combined Canada-and-US result for that family's facts. The cross-border practice is led by Simone Barrett, who is admitted in both Ontario and Florida, so the US-side and Canada-side analysis is handled in one place rather than relayed between separate advisers. For estates where exposure already exists on death, we prepare Form 706-NA, claim the treaty unified and marital credits, coordinate the Canadian terminal T1 and foreign tax credit, secure any required transfer certificate, and respond to IRS examination. If you own — or plan to buy — US property, you are welcome to book a free consultation to review your exposure before it becomes your executor's problem.

Related reading: our Canada-US cross-border tax overview, US-Canada estate planning, cross-border trusts, FIRPTA for Canadian sellers, snowbird tax planning, and departure tax planning for Canadians leaving Canada.

This page is general information, not legal or tax advice. US estate tax for Canadians depends entirely on the specific facts and on the interaction of both countries' rules, which can change; you should obtain advice on your own situation before acting.