Cross-Border Estate Planning for Canadians and Americans: How to Avoid Double Taxation at Death

Canada and the US tax death in fundamentally different ways. Canada has no estate tax. Instead, the deceased is deemed to have disposed of all capital property at fair market value immediately before death (ITA 70(5)), and capital gains tax is paid on the terminal return. The US has a federal estate tax that applies to the fair market value of the decedent’s worldwide estate (for US citizens and residents) or the US-situs estate (for non-residents), with an exemption that shelters most estates. When someone has ties to both countries, or assets in both countries, or beneficiaries in both countries, the interaction between these two systems creates risks of double taxation and opportunities for planning.

How does Canada tax death?

When a Canadian resident dies, ITA 70(5) deems the deceased to have sold all capital property at FMV immediately before death. The resulting capital gains are included in income on the terminal T1 return and taxed at the deceased’s marginal rate (capital gains inclusion rate of 50%).

Assets that trigger deemed disposition include non-registered investment accounts, real estate (other than a designated principal residence), private company shares, and foreign property. Registered accounts (RRSPs, RRIFs) that do not roll over to a surviving spouse are included in income at their full balance.

A spousal rollover (ITA 70(6)) defers the deemed disposition on property transferred to a surviving spouse or common-law partner. The surviving spouse inherits the deceased’s adjusted cost base, and the gain is deferred until the surviving spouse disposes of the property or dies. This rollover is the most common estate planning tool in Canada.

The principal residence exemption (ITA 40(2)(b)) can shelter the gain on one property designated as the deceased’s principal residence. For a couple, each can designate one principal residence, but a family unit can designate only one property per year.

How does the US estate tax work?

The US imposes an estate tax on the fair market value of the decedent’s taxable estate. For US citizens and residents (including green card holders), the tax applies to the worldwide estate. For non-resident non-citizens, the tax applies only to US-situs assets (US real estate, tangible personal property located in the US, and US corporate stock).

The estate tax rate is graduated up to 40%. The unified credit shelters the first $13,990,000 of taxable estate (2025). This means that a US citizen or resident whose estate is worth less than $13,990,000 owes no federal estate tax. For married couples, portability allows the surviving spouse to use the deceased spouse’s unused exemption, effectively doubling the shelter to approximately $28 million.

For non-resident non-citizens, the US estate tax exemption is only $60,000 (without the treaty). The US-Canada treaty increases this to a pro-rata share of the full US exemption based on the ratio of US-situs assets to worldwide assets.

How does the treaty help Canadians with US assets?

Article XXIX-B of the US-Canada treaty provides two key benefits:

Pro-rata unified credit: A Canadian resident (non-US-citizen) who dies with US-situs assets is entitled to a unified credit equal to the greater of (a) the $60,000 statutory credit and (b) the full US unified credit ($13,990,000 exemption equivalent) multiplied by the ratio of US-situs assets to worldwide assets.

Foreign tax credit for Canadian tax: The treaty also allows the US estate to claim a credit for Canadian taxes paid on the same property (the deemed disposition tax from the terminal return). And it allows the Canadian estate to claim a credit for US estate tax paid on the same property. This two-way credit mechanism prevents the same asset from being taxed twice.

What about US citizens living in Canada?

A US citizen living in Canada faces both the US estate tax (on the worldwide estate) and the Canadian deemed disposition (on all capital property at death). The treaty’s foreign tax credit provisions apply: the Canadian terminal return can claim a credit for US estate tax paid, and the US estate return (Form 706) can claim a credit for Canadian tax paid.

In practice, most US citizens in Canada have estates below the US exemption ($13,990,000), so no US estate tax is owed. The Canadian deemed disposition tax is the only tax at death, and no foreign tax credit issue arises. For larger estates, the interaction requires professional coordination.

One planning opportunity for US citizens in Canada: the spousal rollover (ITA 70(6)) defers the Canadian deemed disposition, but the US estate tax applies at death regardless (though the marital deduction under IRC 2056 can defer US estate tax on property passing to a US-citizen surviving spouse). If the surviving spouse is a Canadian citizen (not a US citizen), the US marital deduction requires a Qualified Domestic Trust (QDOT) under IRC 2056A. Without a QDOT, the marital deduction is lost, and the full estate is subject to US estate tax.

What’s a QDOT and when is it needed?

A Qualified Domestic Trust (QDOT) is required when the surviving spouse is not a US citizen and the estate wants to claim the marital deduction to defer US estate tax. The QDOT must meet several requirements: at least one trustee must be a US citizen or US domestic corporation, the trust instrument must require that no distribution of corpus (principal) can be made without the US trustee withholding estate tax, and the trust must comply with regulatory requirements.

This is relevant in the cross-border context when a US citizen dies and the surviving spouse is a Canadian citizen. Without a QDOT, the transfer to the non-citizen spouse does not qualify for the marital deduction, and the full estate above the exemption is taxed immediately. With a QDOT, the tax is deferred until the surviving spouse receives distributions of principal (or at the surviving spouse’s death).

What about life insurance?

Life insurance proceeds are generally not taxable in Canada (the death benefit is received tax-free by the beneficiary). In the US, life insurance proceeds are excluded from income tax under IRC 101, but the policy value is included in the decedent’s gross estate for estate tax purposes if the decedent owned the policy or had incidents of ownership.

For a Canadian resident with US-situs life insurance, the policy value may be subject to US estate tax if the decedent owned a US-issued policy. An Irrevocable Life Insurance Trust (ILIT) can remove the policy from the gross estate, but the trust must be structured carefully in the cross-border context to avoid creating a Canadian or US taxable trust.

What strategies reduce cross-border estate tax?

Rebalance asset location: If the US estate tax is a concern (because US-situs assets are a high proportion of worldwide assets), consider reducing US-situs holdings. For example, a Canadian could sell US real estate and invest the proceeds in Canadian assets, reducing the US estate. Alternatively, holding US real estate through a Canadian corporation can change the situs (the corporation shares are Canadian property, not US real property), though the corporation may be subject to FIRPTA on sale of the real estate.

Joint ownership with right of survivorship: In Canada, joint ownership with a spouse triggers a rollover at death (ITA 70(6)). In the US, joint ownership between spouses results in automatic inclusion of 50% of the value in the deceased spouse’s estate (for estate tax purposes), with a stepped-up basis on the deceased’s half. This can be beneficial for basis purposes but does not reduce the estate tax (the marital deduction would shelter the transfer anyway, assuming the spouse is a US citizen or a QDOT is used).

Trusts: Cross-border trusts must be structured to work under both countries’ rules. A trust that is a “foreign trust” under US law may have onerous US reporting requirements. A trust that is a “Canadian resident trust” may have different tax treatment than intended. Professional guidance is essential for any cross-border trust structure.

Wills: Each country’s assets should be covered by a will that is valid in that jurisdiction. A Canadian will for Canadian assets and a US will for US assets is a common structure. The wills must be coordinated so that they do not revoke each other and so that the estate administration is streamlined.

What forms are involved?

Canadian side:

• T1 terminal return (final return of the deceased, reporting deemed disposition gains)
• T3 trust return (for the estate, if it earns income after death)
• Provincial estate administration tax (probate fees, which vary by province)

US side (for US citizens or residents):

• Form 706 (US Estate and Generation-Skipping Transfer Tax Return): due 9 months after death, with a 6-month extension available
• Form 706-NA (for non-resident non-citizen decedents with US-situs assets): reports only US-situs assets
• Form 3520 (for US beneficiaries receiving from a foreign estate)

Treaty-based claims:

• Form 8833 (Treaty-Based Return Position Disclosure): if the estate claims treaty benefits (pro-rata unified credit, foreign tax credit)
• Canadian equivalent: the treaty claim is made on the T1 terminal return or T3 trust return

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.