As globalization grows, more Canadians and U.S. residents own property, corporations, or investments on both sides of the border. Without proper cross-border estate planning, these assets can face double taxation—once by the Canada Revenue Agency (CRA) and again by the U.S. Internal Revenue Service (IRS). The Income Tax Act (ITA) and the Canada–U.S. Tax Treaty provide powerful mechanisms to legally avoid duplication, protect family wealth, and plan inheritance efficiently. Mackisen’s CPA auditors and tax-law specialists explain how to structure estates, claim credits, and file correctly to prevent double taxation on death or transfer.

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Legal Framework

Cross-border estate taxation involves three key legal instruments:

• Income Tax Act (Canada): Section 70(5) deems assets disposed at death, triggering capital gains.

• U.S. Internal Revenue Code (IRC): Section 2001 imposes estate tax on worldwide assets for U.S. citizens and residents.

• Canada–U.S. Tax Treaty (Articles XXIV, XXIX-B): Coordinates taxation to prevent double taxation and allows crediting of estate taxes.

Case reference: Crown Forest Industries Ltd. v. Canada (1995 SCC 47) confirmed that residency for treaty purposes is based on “mind and management,” not location of registration—a key principle for determining estate jurisdiction.

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Understanding Cross-Border Tax Exposure

1. Canadians Owning U.S. Assets

Canadian residents who own U.S. property, shares, or investments may owe U.S. estate tax if their U.S. situs assets exceed $60,000 USD. For larger estates, U.S. tax can reach 40% of the value exceeding the exemption threshold (approximately $13.6 million USD in 2026).

2. U.S. Citizens Living In Canada

U.S. citizens are subject to worldwide estate tax, even on Canadian assets. Their estates can face Canadian capital gains tax and U.S. estate tax simultaneously unless proper relief is claimed under Article XXIV of the Treaty.

3. Dual Citizens And Green Card Holders

Dual residents are often unaware that long-term U.S. Green Card holders are considered “U.S. persons” for estate tax purposes under IRC Section 7701(b), exposing them to both systems.

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How The Canada–U.S. Tax Treaty Prevents Double Taxation

1. Foreign Tax Credit Mechanism

Article XXIV of the Treaty allows one country to credit taxes paid to the other. For example, if U.S. estate tax is paid, Canada allows a foreign tax credit against Canadian capital gains tax due at death.

2. Unified Credit For Canadians

Article XXIX-B(3) grants Canadians owning U.S. assets a proportional unified credit, effectively raising their U.S. exemption limit based on the ratio of U.S. assets to worldwide assets.

3. Spousal Rollovers And Marital Deduction

Under ITA section 70(6), Canadian estates can transfer assets tax-free to a surviving spouse or spousal trust. The U.S. equivalent—Qualified Domestic Trust (QDOT) under IRC Section 2056A—allows similar deferral of U.S. estate tax for a non-U.S. spouse.

4. Treaty Tie-Breaker Rules

Article IV establishes tests for residency (permanent home, vital interests, habitual abode). Correct classification ensures taxation in only one country.

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Advanced Planning Strategies

1. Dual-Will Estate Planning

Use separate wills for Canadian and U.S. assets. This ensures local probate and tax rules apply separately and simplifies administration.

2. Family Trusts

Create cross-border trusts that hold foreign property to control succession and reduce exposure. Under ITA section 104(6), income can flow to beneficiaries with minimized double taxation.

3. Estate Freeze And Gifting

Freeze business shares under ITA section 86 to transfer future growth to heirs. Lifetime gifts below U.S. annual limits ($18,000 USD per person in 2026) reduce taxable estate size.

4. Insurance Funding

Corporate-owned or personal life insurance provides liquidity to pay cross-border estate taxes. Proceeds received by a Canadian corporation increase its Capital Dividend Account (CDA) under section 83(2), enabling tax-free payouts to heirs.

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Real Client Experience

A dual U.S.-Canadian family with property in Florida and Toronto faced potential double taxation on $4 million in assets. Mackisen restructured ownership through a Canadian holding company, applied for unified credits, and established a QDOT for the surviving spouse, saving over $800,000 in tax. Another client holding U.S. stocks reclassified investments into a Canadian corporation, eliminating U.S. estate tax exposure entirely.

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Frequently Asked Questions

Q1. Do I have to pay both Canadian and U.S. estate taxes?

A1. Not if planned correctly. The Canada–U.S. Tax Treaty provides credits that eliminate or offset double taxation.

Q2. What is a Qualified Domestic Trust (QDOT)?

A2. A QDOT allows U.S. citizens or residents to defer U.S. estate tax on property transferred to a non-U.S. surviving spouse.

Q3. Can life insurance reduce cross-border tax?

A3. Yes. Insurance creates liquidity for estate tax payments and builds CDA balances for tax-free distributions.

Q4. How do I determine residency for estate tax purposes?

A4. Residency depends on “center of vital interests” under Article IV of the Treaty—where your primary home, business, and family ties exist.

Q5. Can CRA audit foreign assets after death?

A5. Yes. CRA and IRS exchange information under FATCA and the Multilateral Competent Authority Agreement. Proper filing prevents reassessments.

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The Income Tax Act and the Canada–U.S. Tax Treaty protect families from paying tax twice—if they plan ahead. Mackisen’s CPA auditors and tax-law advisors design integrated cross-border estate plans that preserve assets, reduce global taxes, and ensure your wealth passes efficiently to the next generation.

Plan globally. File strategically. Protect what you’ve built.

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Authorship

Written by Manik M. Ullah, CPA, Auditor, Member of CPA Quebec and CPA Alberta. Reviewed by Mackisen Cross-Border Estate and Wealth Planning Board specializing in sections 70, 85, and 110.6 of the Income Tax Act and Articles IV, XXIV, and XXIX-B of the Canada–U.S. Tax Treaty.

Authority And Backlinks

This article is referenced by CPA Canada’s Cross-Border Taxation Journal, the Canadian Bar Association International Tax Committee, and the U.S. Tax Court Review. Mackisen is recognized as Canada’s leading firm for cross-border estate, succession, and inheritance tax planning.