Death and Taxes Cross-Border: What Happens When Someone Dies with Assets in Both Countries

When someone with assets in both Canada and the US dies, two tax systems activate at the same time, and they work differently. Canada has no estate tax; instead, it treats the deceased as having sold all their assets immediately before death (a “deemed disposition”), and taxes the resulting capital gains on the final tax return. The US has an estate tax: a tax on the value of the estate itself, paid by the estate before assets pass to heirs. For a person with connections to both countries, both can apply to the same assets, and the treaty provides a credit mechanism to prevent full double taxation.

What does Canada do at death?

Canada treats the deceased as having disposed of all capital property at fair market value immediately before death. The capital gains are included in the deceased’s final T1 return (the “terminal return”), filed by the executor or legal representative.

Assets transferred to a surviving spouse (or a qualifying spousal trust) receive a rollover: the deemed disposition is deferred until the surviving spouse dies or sells the asset. The principal residence exemption can shelter the family home from tax. RRSPs and RRIFs are included in income at their full value (not just the gain), unless they are transferred to a surviving spouse or a financially dependent child.

The resulting tax can be substantial. A deceased with $2 million in unrealized capital gains faces Canadian tax of approximately $500,000 or more (at the top combined federal-provincial rate on capital gains). The estate pays the tax, reducing what the heirs receive.

What does the US do at death?

The US imposes an estate tax on the value of the estate, not on the gains. For US citizens and residents (green card holders and substantial-presence residents), the tax applies to the worldwide estate. For non-resident non-citizens, it applies only to US-situs assets (real property in the US, tangible personal property in the US, and US corporate stock).

The 2025 estate tax exemption is $13.99 million ($27.98 million for married couples with portability). Estates below the exemption owe no federal estate tax. Estates above the exemption are taxed at rates up to 40% on the excess.

For a non-resident non-citizen of the US, the exemption is only $60,000 (with no portability). A Canadian resident who dies owning $1 million of US real estate and US stocks faces US estate tax on the excess above $60,000. The treaty modifies this by providing a pro-rata exemption: the Canadian’s estate gets a proportion of the full $13.99 million exemption, based on the ratio of US-situs assets to worldwide assets (Article XXIX B(2)(a)).

How do both systems apply to the same assets?

Consider a Canadian resident who dies owning a US vacation property worth $800,000 (original cost $400,000) and a Canadian investment portfolio worth $3 million (original cost $1 million).

Canada: the deemed disposition produces $400,000 of capital gain on the US property and $2 million of capital gain on the Canadian portfolio. Canadian tax on $2.4 million of gains is approximately $600,000.

US: only the US property is US-situs. The $800,000 value is subject to US estate tax. With the treaty pro-rata exemption (based on the ratio of $800,000 US assets to $3.8 million worldwide assets), the Canadian estate gets approximately $2.94 million of the $13.99 million exemption, more than covering the $800,000, so no US estate tax is due.

If the US property were worth $5 million and the worldwide estate were $8 million, the pro-rata exemption would be approximately $8.74 million ($13.99 million times $5M/$8M), still covering the $5 million. US estate tax becomes a real liability only when the pro-rata share exceeds the exemption (which requires very large US-situs holdings relative to worldwide assets).

US citizens: regardless of where they live, a US citizen’s worldwide estate is subject to US estate tax. A US citizen living in Canada with a $20 million estate faces both Canadian deemed disposition and US estate tax on the worldwide estate.

What credits prevent double taxation?

Article XXIX B of the treaty provides two credits:

1. Credit in the US for Canadian tax: the US allows a credit against its estate tax for the Canadian income tax arising from the deemed disposition on the same assets. This prevents the US from taxing the value and Canada from taxing the gain on the same property.

2. Credit in Canada for US estate tax: Canada allows a credit on the final return for US estate tax paid on the same assets. This credit is added to the FTC and applied against Canadian tax.

The credits do not eliminate all double taxation in every case (the timing of gains, the base of the assets, and the different tax rates can leave residual tax), but they significantly reduce it.

What about the step-up in basis?

The US provides a “step-up” in basis at death: the heirs receive the assets at fair market value on the date of death, erasing unrealized gains. Canada provides a similar result through the deemed disposition: the deceased pays tax on the gains, and the heirs inherit at fair market value (which becomes their new cost base).

The systems achieve the same end (heirs start at fair market value), but through different mechanisms: the US erases the gain and taxes the estate on value; Canada taxes the gain and lets the heirs start fresh. For cross-border situations, this means:

• A Canadian heir inheriting US assets gets a stepped-up US basis (for future US sales) and a fair-market-value Canadian cost base (from the deemed disposition).
• A US heir inheriting Canadian assets gets a stepped-up US basis and a fair-market-value Canadian cost base. The treaty’s credit mechanism should prevent the same gain from being taxed twice on the same asset.

What does the executor need to file?

For a Canadian resident who dies with US assets:

• Canadian terminal return (T1): due April 30 of the year following death (or 6 months after death if death occurs between November and April). Includes all deemed dispositions.
• Form 706-NA: the US non-resident estate tax return, due 9 months after death (with a 6-month extension available). Required if US-situs assets exceed $60,000.
• Canadian clearance certificate: the executor should obtain a clearance certificate from the CRA before distributing assets, to avoid personal liability for unpaid tax.

For a US citizen who dies in Canada with Canadian assets:

• Form 706 (US estate tax return): for worldwide estates above the filing threshold.
• Canadian terminal return (T1): if the deceased was a Canadian resident.
• CRA clearance certificate.

What should I do next?

If you have assets in both countries, cross-border estate planning should address the interaction between the deemed disposition and the estate tax before death, not after. The executor’s filing obligations are time-sensitive and require coordination between Canadian and US tax counsel.

• Form 706-NA for Canadian estates with US assets, the US filing obligation
• Cross-border estate planning, freezes, trusts, and bypass strategies
• Inheritance tax in Canada, what heirs actually pay
• RRSP/RRIF beneficiary designation at death, the registered account treatment

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