U.S. Estate Tax and Canadians – A Complete Guide by a Montreal CPA Firm Near You

Introduction

Many Canadians are surprised to learn that even if they live full-time in Canada, they can still be subject to U.S. estate tax. If you own U.S. assets such as stocks, ETFs, real estate, or business interests, your estate may face significant tax exposure on death. U.S. estate tax has high exemption thresholds but applies to “U.S. situs property,” and the rules differ for Canadians. Without proper planning, your estate could owe tens or even hundreds of thousands of dollars. This guide explains how U.S. estate tax works for Canadians, how the Canada–U.S. Tax Treaty reduces tax, and how to protect yourself and your heirs.

Legal and Regulatory Framework

U.S. estate tax is governed by the Internal Revenue Code (IRC). It applies to the worldwide estates of U.S. citizens and residents, and to the U.S. situs assets of non-resident aliens (including Canadians). U.S. situs property includes: U.S. real estate, U.S. stocks and ETFs (even held in Canadian brokerage accounts), tangible property located in the U.S., and certain U.S. business assets. Tax is calculated using a progressive rate structure up to 40%. The Canada–U.S. Tax Treaty provides a prorated unified credit to Canadians, significantly reducing or eliminating estate tax in many cases.

Key Court Decisions

In Estate of Jorgensen v. Commissioner, the IRS successfully assessed estate tax on U.S. real estate owned by Canadian residents. In Estate of Khan v. United States, the court reaffirmed that U.S. securities owned by non-residents are U.S. situs assets subject to estate tax. In Estate of Swanson, the courts clarified valuation rules for cross-border estates. These cases highlight the broad reach of U.S. estate tax and the importance of Treaty protection.

What Is Considered U.S. Situs Property?

U.S. situs property includes: U.S. real estate (homes, condos, rentals), U.S. publicly traded stocks, U.S. ETFs and mutual funds, tangible personal property located in the U.S., interests in U.S. partnerships or LLCs (depending on structure), some U.S. treasury instruments, and certain business assets. Assets not considered U.S. situs include: cash held in U.S. banks, U.S. government bonds in some cases, and non-U.S. investment funds.

When Does Estate Tax Apply to Canadians?

Estate tax applies when a Canadian dies owning U.S. situs property and the value of their worldwide estate exceeds the applicable exclusion amount. For U.S. citizens, this threshold is very high (over USD $12 million currently). For Canadians, the Treaty grants a prorated unified credit based on the ratio of U.S. situs assets to worldwide assets. Without the Treaty, Canadians would only have a USD $60,000 exemption, exposing many estates to significant tax.

How the Treaty Protects Canadians

The Canada–U.S. Tax Treaty (Article XXIX-B) gives Canadians a fraction of the U.S. unified credit: Unified Credit × (U.S. situs assets ÷ worldwide estate). This dramatically reduces tax. Example: If a Canadian with a $4M worldwide estate owns $400K of U.S. stocks, the exempt portion is 10% of the U.S. unified credit. This often eliminates estate tax entirely—but must be calculated correctly. Spousal deductions and marital credits are also available, but only when structured properly.

Special Case: U.S. Real Estate

U.S. real estate is always U.S. situs property. Canadians who own Florida condos, Arizona rental homes, or investment properties may face additional complexities: FIRPTA withholding on sale, U.S. state probate, and potential estate tax if values are high relative to worldwide assets. Joint ownership can complicate matters if spouses are not U.S. citizens.

Special Case: U.S. Stocks

Many Canadians do not realize that even U.S. stocks held in a Canadian brokerage account are considered U.S. situs assets. This includes shares of Apple, Tesla, Microsoft, Costco, Amazon, and U.S.-domiciled ETFs (e.g., SPY, QQQ). TFSA and taxable accounts can both create estate tax exposure. RRSPs may also be included depending on structure.

Planning Strategies to Reduce or Eliminate U.S. Estate Tax

Strategies include: diversifying out of U.S. situs assets for high-net-worth individuals, holding U.S. investments through Canadian-domiciled ETFs (which are not U.S. situs), structuring ownership of U.S. real estate through corporations (with caution), using life insurance to cover potential U.S. estate tax liability, using spousal rights effectively under the Treaty, and reviewing asset values annually relative to estate thresholds. Proper planning eliminates most risks.

Common Mistakes Canadians Make

Common errors include: assuming U.S. real estate is tax-free, ignoring U.S. stocks held in Canadian accounts, misunderstanding the $60,000 exemption, failing to track worldwide estate value, using joint ownership improperly, and failing to plan for U.S. estate tax when purchasing property. Many Canadians only discover the issue when a family member dies and the estate faces IRS complications.

Mackisen Strategy

At Mackisen CPA Montreal, we help Canadians evaluate their U.S. estate tax exposure, apply Treaty calculations, restructure assets, select optimal investment vehicles, handle U.S. real estate sales, and plan cross-border estates. Our team ensures that your legacy passes to your heirs—not to the IRS.

Real Client Experience

A Montreal family with $700K in U.S. stocks avoided estate tax through restructuring and switching to Canadian-domiciled ETFs. A snowbird owning a Florida condo restructured ownership to eliminate exposure under Treaty rules. A high-net-worth couple faced seven-figure estate tax liability; we implemented a plan combining Treaty optimization, asset restructuring, and insurance funding.

Common Questions

Do Canadians really owe U.S. estate tax? Yes—if they own U.S. situs property and exceed Treaty thresholds. Are U.S. ETFs taxed? Yes—if U.S.-domiciled. Do joint accounts avoid estate tax? Not always. Can estate tax be eliminated? Often—through planning. Are RRSP U.S. holdings included? Yes, depending on asset type.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal ensures Canadians with U.S. property or investments stay protected from estate tax exposure. We provide proactive planning, precise Treaty calculations, and full cross-border support.