U.S. Estate Tax and Canadians: Understanding Exposure, Thresholds, and Tax Planning Strategies

Introduction

Many Canadians are surprised to learn that owning U.S. assets — even as a non-resident — can expose them to U.S. estate tax upon death. U.S. estate tax applies not only to Americans, but also to Canadians who own certain U.S. property, including U.S. real estate, U.S. stocks, U.S. business interests, and tangible personal property located in the United States. Although the current U.S. estate tax exemption is high, it may be reduced in the future, putting many Canadians at risk of unexpected estate costs. This guide explains how U.S. estate tax works for Canadians, whether you are exposed, how the Canada–U.S. Tax Treaty provides relief, and which tax planning strategies can protect your assets.

What Is U.S. Estate Tax?

U.S. estate tax is a tax on the fair market value of certain U.S. property owned at the time of death. Unlike Canada, which taxes capital gains at death, the U.S. taxes the total value of assets. For non-U.S. residents (including Canadians), estate tax applies only to U.S. situs property, but the tax can still be significant.

What U.S. Assets Trigger Estate Tax for Canadians

U.S. estate tax applies to the following U.S.-situs property:
U.S. real estate (homes, condos, rental properties)
U.S. stocks (including shares of U.S.-listed companies)
U.S. mutual funds and U.S.-listed ETFs
U.S. business assets or partnerships holding U.S. property
Tangible personal property located in the U.S. (vehicles, boats, artwork)
U.S. pension assets and certain annuities may also be partly exposed depending on structure. RRSP or TFSA ownership of U.S. stocks does not shield assets from estate tax exposure because the IRS looks at the underlying U.S. property.

Assets That Do Not Trigger Estate Tax

Canadian mutual funds (even if holding U.S. securities)
Canadian ETFs holding U.S. stocks
Canadian real estate
Canadian corporations holding U.S. investments (in certain structures)
Bank deposits in the U.S. used solely for banking purposes (not investments)
Correct asset classification is critical — misclassification is a common mistake during cross-border estate settlements.

Current U.S. Estate Tax Exemption for Canadians

The U.S. estate tax exemption is approximately 13 million USD. However, for non-residents, the default exemption is only 60,000 USD. Fortunately, the Canada–U.S. Tax Treaty provides Canadian residents a prorated exemption based on worldwide estate value. This means Canadians can access the same high exemption if their worldwide estate is below the threshold. The calculation is:
U.S. assets / worldwide assets × U.S. exemption amount
If the worldwide estate or U.S. estate values increase significantly, Canadians may face estate tax even if not U.S. citizens.

Why Estate Tax Risk Is Growing for Canadians

Several factors increase exposure:
U.S. real estate values have risen dramatically
Canadian portfolios increasingly include U.S.-listed stocks
Future U.S. estate tax exemptions may drop significantly
Many Canadians are unaware their assets are exposed
U.S. situs property held inside RRSPs or RRIFs is still subject to estate tax rules
High-net-worth Canadians may be pulled into the U.S. estate tax system unintentionally.

How the Canada–U.S. Tax Treaty Helps Canadians

The treaty offers several protections:
access to the prorated unified exemption
foreign tax credit to offset Canadian capital gains tax at death
deductions for funeral expenses, debts, and administration fees
credit for U.S. estate tax paid on U.S. assets held in Canadian trusts (limited)
treaty-based elections to reduce double taxation
Without the treaty, Canadians would face much harsher estate tax outcomes.

How Double Taxation Happens Without Planning

Canada taxes deemed disposition (capital gains) on death. The U.S. taxes the fair market value of U.S. assets. Without treaty planning, heirs may face:
U.S. estate tax
Canadian capital gains tax
potential state-level inheritance taxes
foreign tax credit restrictions
improper valuation of real estate
Incorrect planning can lead to severe double taxation.

Common Risk Situations for Canadians

owning a U.S. vacation property that appreciated significantly
holding large U.S. stock portfolios in RRSP, RRIF, or taxable accounts
owning U.S. rental buildings with high market value
having a worldwide estate exceeding 10–15 million CAD
using cross-border trusts without proper tax advice
passing U.S. assets to children without planning
These are among CRA and IRS’s highest-risk categories for cross-border estates.

Planning Strategies to Reduce U.S. Estate Tax Exposure

holding U.S. stocks through Canadian mutual funds or ETFs
owning U.S. real estate through Canadian corporations (with caution)
using cross-border trusts with treaty elections
life insurance to cover potential estate tax
selling or gifting U.S. property before the exemption drops
allocating U.S. stocks to RRSP instead of TFSA (for estate tax purposes)
diversifying foreign holdings to reduce U.S.-situs concentration
Each strategy requires careful tax modeling to avoid unintended consequences.

Recordkeeping Requirements

To support treaty benefits or estate tax calculations, Canadians must maintain:
property deeds
brokerage statements
purchase and sale records
currency conversion documentation
estate valuations at death
records of worldwide estate assets
IRS Form 706-NA filings when required
Good documentation prevents penalties, delays, and reassessments.

Mackisen Strategy

At Mackisen CPA Montreal, we help Canadians assess U.S. estate tax exposure, calculate cross-border estate liabilities, structure investments to reduce risk, and file IRS Form 706-NA when needed. We work with advisors to create tax-efficient cross-border estate plans and protect families from unexpected U.S. tax bills.

Real Client Experience

A Montreal family owning Florida property reduced estate tax exposure through restructuring. A high-net-worth investor avoided future IRS tax by shifting U.S. stock holdings into Canadian ETFs. A business owner’s estate saved thousands by claiming treaty exemptions correctly. An estate executor avoided penalties after Mackisen filed overdue IRS non-resident estate forms.

Common Questions

Do Canadians owe U.S. estate tax on U.S. real estate? Yes. Are U.S.-listed stocks included? Yes. Does the treaty eliminate all estate tax? Only if values fall within prorated limits. Can RRSPs shield U.S. stocks? No. Can exposure increase if exemption drops? Yes significantly.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps Canadians protect wealth by assessing U.S. estate tax exposure, optimizing treaty benefits, and building cross-border estate strategies that safeguard families from unexpected tax liabilities.