Cross-Border Inheritance: How Canada and the US Tax an Estate That Crosses the Border

Canada and the US tax estates at death through completely different mechanisms. Canada has no inheritance tax and no estate tax. Instead, ITA 70(5) deems the deceased to have disposed of all capital property at fair market value immediately before death, creating a capital gain on the final T1 return. The US has an estate tax (a tax on the right to transfer property at death, levied on the estate, not the heir) but no deemed disposition. The estate tax applies only if the estate exceeds the exemption ($13.61 million in 2024, $13.99 million in 2025). When the deceased lived in one country and the heir lives in the other (or the deceased owned assets in both countries), both systems apply simultaneously, and the interaction produces results that neither system alone would produce.

What happens when a Canadian resident dies?

Canadian side. The deceased is deemed to have disposed of all capital property at FMV immediately before death (ITA 70(5)). The executor files a final T1 return reporting the deemed capital gains. The principal residence exemption eliminates the gain on the home (if it qualifies). RRSPs and RRIFs are included in income in full (unless the beneficiary is a surviving spouse or dependent, in which case a rollover is available under ITA 60(l)).

• US side. If the deceased was not a US citizen or domiciliary, the US estate tax applies only to US-situs assets (US real property, US corporate stock, US business assets). The exemption for non-citizens who are not US domiciliaries is only $60,000 (not the $13+ million available to US citizens), but the Canada-US treaty (Article XXIX B(2)) provides a prorated exemption based on the ratio of US-situs assets to worldwide assets.
• Heir receiving assets. The heir receives the assets with a cost basis equal to the FMV at the date of death (for Canadian purposes, because the deemed disposition resets the ACB). For US purposes, the heir receives a “step-up” in basis to FMV under IRC 1014. The two bases should be the same (both FMV at death), but currency conversion differences can create a discrepancy.

What happens when a US citizen dies with Canadian assets?

US side. The estate includes all worldwide assets. The estate tax applies to the worldwide estate above the exemption ($13+ million). The executor files Form 706 (US Estate Tax Return). Canadian assets are included at FMV in USD.

• Canadian side. If the deceased was a Canadian resident (a US citizen living in Canada), the deemed disposition under ITA 70(5) applies to all assets, producing capital gains tax on the final T1. If the deceased was not a Canadian resident, Canada taxes only Canadian-situs property (real property, certain business property, and taxable Canadian property).
• Treaty relief. Article XXIX B(6) allows a credit against the Canadian deemed-disposition tax for a portion of the US estate tax attributable to the same property. Article XXIX B(7) allows a credit against the US estate tax for the Canadian income tax attributable to US-situs property. The credits are complex to calculate and do not always produce full relief.

What happens when the heir is in the other country?

Canadian deceased, US-resident heir. The heir receives the assets with a stepped-up basis (both ACB in Canada and cost basis in the US equal to FMV at death). The heir’s future gains are measured from this new basis. If the inherited assets include Canadian investments (Canadian mutual funds, Canadian-listed stocks), the US heir has new FBAR and Form 8938 reporting obligations on the inherited accounts. If the inherited assets include Canadian mutual funds, they may be PFICs for the US heir.

• US deceased, Canadian-resident heir. The heir receives the assets with a stepped-up US basis under IRC 1014. For Canadian purposes, the ACB is the FMV at the date of death (the deemed disposition in Canada only applies if the deceased was a Canadian resident; if the deceased was not a Canadian resident, the heir’s ACB is the FMV at death under the general rules for inherited property). If the inherited assets include US investments, the Canadian heir has Canadian reporting obligations (T1135 if the total cost of foreign property exceeds $100,000).

What about inherited RRSPs, RRIFs, and 401(k)s?

RRSP/RRIF inherited by a US-resident heir. The RRSP or RRIF balance is included in the deceased’s final T1 return (unless rolled over to a surviving spouse). Canada taxes the full balance as income. If the US-resident heir receives the RRSP/RRIF proceeds, the payment is also US-taxable (as a distribution from a foreign pension). The FTC coordinates: the US credits the Canadian tax paid on the inclusion.

• 401(k)/IRA inherited by a Canadian-resident heir. The inherited 401(k) or IRA is subject to US income tax when distributed (unless it is a Roth). Part XIII withholding does not apply (the payment is from a US source, not a Canadian source). Canada taxes the distribution as income (pension income), and the US tax paid is credited via the FTC on the Canadian return. See inheriting a US IRA or 401(k) as a Canadian.

What about life insurance?

Life insurance proceeds are generally tax-free to the beneficiary in both countries. In Canada, the death benefit from a life insurance policy is received tax-free by the beneficiary (the ACB of the policy may generate a gain inside the policy on disposition, but the death benefit itself is not taxable income). In the US, life insurance proceeds are excluded from gross income under IRC 101(a). However, the proceeds are included in the gross estate for US estate tax purposes.

• For cross-border estates, life insurance can be a planning tool: it provides liquidity to pay the Canadian deemed-disposition tax or the US estate tax without forcing a sale of assets.

What should I do next?

If you expect a cross-border estate situation (you own assets in both countries, or your heirs are in a different country), plan the estate while you are alive. The two-wills structure (one for each country’s assets) avoids probate complications. The estate planning freeze can lock in values before death. And the treaty credits under Article XXIX B must be modeled in advance to confirm that the double-taxation relief works for your specific asset mix.

• US estate tax for Canadians: the $60,000 exemption, the estate tax exposure for Canadian residents with US assets
• Do I need two wills?, the situs-based will structure
• Estate planning freezes cross-border, the freeze mechanics for cross-border families
• Inheriting a US IRA or 401(k) as a Canadian, the retirement account inheritance
• Inheritance or gift from a Canadian parent, the US-person-heir perspective

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