Form 706-NA: filing the US estate tax return for a Canadian who died owning US assets

A Canadian dies owning a Florida condo and a brokerage account holding US shares. Nine months later the IRS expects a return, the brokerage has frozen the account, the title company will not close a sale, and the family discovers that the $60,000 figure everyone quotes is a filing threshold measured on gross value, not a deduction. This guide is the mechanics side: what triggers Form 706-NA, how the Canada-US treaty replaces the tiny default credit, what the estate has to hand over to claim it, and why the assets stay locked long after the tax question is settled.

When is Form 706-NA actually required?

Once the date-of-death value of the decedent’s US-situated assets, added to the gift tax specific exemption and adjusted taxable gifts, exceeds $60,000, the executor has to file. That test runs on gross value. A mortgage on the condo does not reduce it, the treaty credit that may eventually wipe out the tax does not reduce it, and the fact that the estate will owe nothing does not excuse the return.

The statutory hook is IRC 6018(a)(2), and the Instructions for Form 706-NA state it the same way. The threshold has never been indexed for inflation. It was set decades ago and it has not moved, which is why an ordinary Canadian retiree with a modest US brokerage account now clears it without owning any US real estate at all.

Two features of the threshold catch people. First, it is a gross number. An executor who nets a $400,000 condo against a $350,000 mortgage and concludes there is nothing to report has applied the wrong test. Second, lifetime US gifts count against it. A Canadian who gave away US-situs property during life and used part of the gift tax specific exemption has already spent some of the $60,000 headroom before death.

How long does the estate have to file?

Nine months from the date of death, under IRC 6075(a). Form 4768 buys an automatic six-month extension of time to file if it is filed on or before the original due date. It does not extend the time to pay. Payment is still due at nine months, and an extension to pay is a separate, discretionary request under IRC 6161.

The distinction between filing and paying is the single most expensive misunderstanding in this area. A timely Form 4768 stops the late-filing penalty. It does nothing about the late-payment penalty or interest, both of which start running from the original nine-month date. If the estate expects to owe, the executor should remit an estimate with the extension request rather than wait for a finished valuation.

Form 4768 also has a second track. Part II allows a discretionary extension for cause, which an executor can request up to six months after the original due date if there is a real reason the return could not be completed. Executors administering an estate from outside the United States have historically been given more latitude here, but “more latitude” is not “automatic,” and the request has to explain the specific obstacle.

Nine months is tight for a cross-border estate. Probate has to be opened, US real property has to be appraised as of the date of death, and brokerage values have to be reconstructed for the exact death date rather than a month-end. Plan on extending from the start rather than treating the extension as a rescue.

What counts as US-situs property at death?

Situs for estate tax purposes has its own rules, and they do not track income tax sourcing or where the paperwork physically sits. The gross estate of a non-resident non-citizen is only property “situated in the United States” at death under IRC 2103, with the situs rules supplied by IRC 2104 and IRC 2105.

Three categories cover most Canadian estates.

US real property. Land and buildings physically in the United States, including a vacation home, a rental condo, a share of a family cottage across the border, and a mineral or timber interest. This is the least controversial category and the one that produces the largest values.

Tangible personal property located in the US. A car garaged in Arizona, artwork hanging in a Florida condo, jewelry in a US safe deposit box, a boat moored in a US marina. Physical location at the moment of death controls, which means a temporarily relocated item can pull an estate over the threshold.

Shares of US corporations. IRC 2104(a) makes stock of a domestic corporation US-situs property regardless of where the certificate is held, which custodian holds it, or which country’s account it sits in. Apple shares in a Canadian discount brokerage inside a non-registered account are US-situs property. This is the rule that surprises people the most, because every other instinct says the account is Canadian, so the asset is Canadian.

Also included: debt obligations of a US person or the US government that fall outside the portfolio interest carve-out, partnership interests where the partnership carries on business in the US (the IRS position, though the law here is less settled than practitioners would like), and property transferred during life with a retained interest under the transfer rules that also apply to citizens.

Which US assets are outside the estate tax?

Three exclusions do most of the work, and they are the reason a Canadian’s US exposure is often much smaller than the raw account balance suggests. US bank deposits not connected to a US trade or business, most US corporate and government bonds under the portfolio debt rules, and life insurance proceeds on the decedent’s own life all fall outside the US gross estate.

Bank deposits. IRC 2105(b) takes deposits with US banks out of the gross estate where the interest would not be effectively connected with a US trade or business. A Canadian snowbird’s US chequing account used for condo utilities is not US-situs property for estate tax. Deposits held at a foreign branch of a US bank are also outside.

Portfolio debt. Obligations issued after July 18, 1984 that qualify as portfolio debt under the interest-exemption rules are excluded. US Treasury bonds and most US corporate bonds held by a Canadian therefore sit outside the US gross estate, even though the shares of the same issuer would be inside it. A portfolio split between US equities and US bonds has a very different estate tax profile from one weighted entirely to equities.

Life insurance. Proceeds on the life of a non-resident non-citizen decedent are excluded by IRC 2105(a), including proceeds from a US insurer. That is the opposite of the treatment a US citizen gets, where policy proceeds land in the gross estate unless ownership was stripped out during life.

Two traps sit inside these exclusions. A US money market fund is not a bank deposit. It is a share in a US investment company, and it is US-situs stock. And a US brokerage account is not a bank account for this purpose either. What matters is what the account holds, security by security, not the label on the statement. Sorting a single brokerage statement into US shares, non-US shares, portfolio bonds, and cash is often the entire valuation exercise.

Why is the non-resident credit so much smaller?

The estate of a US citizen or domiciliary computes tax on the worldwide estate and then applies the full unified credit, which for deaths in 2026 shelters $15,000,000 of taxable estate. A non-resident non-citizen computes tax only on US-situs property but gets a credit of $13,000 under IRC 2102(b)(1). That $13,000 is exactly the tentative tax on $60,000, which is where the famous number comes from.

Nothing in the statute ever says “$60,000 exemption.” It says a credit of $13,000, and the rate table in IRC 2001(c) does the rest. The distinction matters because a credit is a fixed dollar amount, not an amount of value carved out. Once the taxable estate passes $60,000, the marginal rate climbs quickly through the graduated brackets toward the 40 percent top rate, and it gets there faster than most people expect because the brackets are compressed at the bottom.

The asymmetry is not an accident. The US taxes citizens and domiciliaries on everything they own everywhere and gives them a large exclusion in exchange. It taxes non-residents on a narrow slice of property and gives them a token credit. Left alone, a $700,000 Florida property produces a six-figure US estate tax bill on an estate that would owe nothing if the decedent had been a US citizen with the same net worth.

That default is what the treaty exists to fix. The article on the $60,000 exemption works through the arithmetic of the default credit in more detail.

How does the treaty prorated credit work?

Article XXIX B(2) of the Canada-US treaty gives the estate of a Canadian resident who is not a US citizen the greater of the $13,000 statutory credit and a prorated share of the credit a US citizen’s estate would get. The proration is a ratio: the full US applicable credit amount multiplied by US-situs assets over the worldwide gross estate.

Written out, the formula is:

Treaty credit = (full US applicable credit amount) x (US-situs gross estate / worldwide gross estate)

The numerator is the value of the property that is in the US gross estate. The denominator is everything the decedent owned anywhere on the date of death, valued the same way. The idea is that a Canadian should get the same proportion of the US exclusion that their US property bears to their whole estate, which puts them roughly where a US citizen with the same US assets and the same total wealth would sit.

Because the credit is the greater of the two figures, the treaty can never leave an estate worse off than the statute. It is also capped: under IRC 2102(b)(4) it cannot exceed the tax imposed, so at best it zeroes the bill. No refund, nothing carried forward.

Two adjustments narrow the number. Credit already used against lifetime US gifts reduces what is left at death. And IRC 2102(b)(3)(A) provides that property exempt from US estate tax under a treaty obligation is not treated as situated in the United States for this computation, which strips it out of the numerator and shrinks the fraction.

There is a separate relief valve in Article XXIX B(8) that is easy to miss. Where the worldwide gross estate of a Canadian resident does not exceed US$1,200,000, the US may only tax property whose gain would be taxable to a Canadian under the treaty’s capital gains article, which is essentially US real property and business property of a US permanent establishment. For a smaller estate whose only US assets are shares, that provision can remove the exposure entirely rather than merely crediting it away.

What does claiming the treaty credit cost you?

The credit is conditional on disclosure. Article XXIX B(2) allows the prorated credit only if all the information necessary to verify and compute it is provided, and the fraction cannot be computed without the denominator. So claiming the treaty credit means telling the IRS the value of the decedent’s entire worldwide estate, including the Canadian house, the RRSP or RRIF, the private company shares, and the cottage in Muskoka.

This is the tradeoff nobody expects, and it is worth naming plainly before the family agrees to it. An estate that would have filed a short return listing one condo instead files a return that lays out the decedent’s complete net worth, valued and supported, to a foreign tax authority that has no other claim on any of it.

The disclosure obligation is doubled by domestic law. IRC 2106(b) denies a non-resident estate the deductions for expenses, debts, taxes, losses, and charitable transfers unless the return includes the value of the part of the gross estate that is not situated in the United States. So an estate that wants deductions is disclosing the worldwide estate whether or not it wants the treaty credit.

In practice the disclosure is not a reason to skip the credit. The alternative is usually a real six-figure tax bill. But it does change the work. Worldwide values have to be defensible, not estimated, because they are now driving a US tax computation. Private company shares and real property need support. And the executor should understand before signing that the return is a full financial picture, not a US-only filing. The treaty overview covers how the rest of the convention fits together.

What relief exists for a non-citizen spouse?

A US citizen surviving spouse gets an unlimited marital deduction. A non-citizen spouse does not, because Congress worried the property would leave the US tax net untaxed. Two routes fix this for a Canadian widow or widower: a qualified domestic trust under IRC 2056A, or the treaty marital credit under Article XXIX B(3).

The treaty marital credit. Where property passes to a surviving spouse and would have qualified for the marital deduction had the spouse been a US citizen, Article XXIX B(3) allows a non-refundable credit equal to the lesser of two amounts: the unified credit allowed under Article XXIX B(2), and the US estate tax otherwise imposed on the property passing to the spouse. In effect it can double the treaty credit, once for the decedent and once again against the tax on the spousal share.

The conditions matter. The decedent must have been a US citizen or a resident of the US or Canada at death, the surviving spouse must have been a resident of the US or Canada, and where both were US residents at least one must have been a Canadian citizen. The executor must affirmatively elect the treaty benefit and waive the estate tax marital deduction, which means waiving the QDOT route. The two are alternatives, not a stack. The election is made on the return with a statement showing the computation, so it is not something that can be added later once the family notices the bill.

The QDOT. A qualified domestic trust preserves the marital deduction by keeping the property under US collection jurisdiction. At least one trustee must be a US citizen individual or a domestic corporation, that trustee must have the right to withhold estate tax on distributions, the executor must elect QDOT treatment on the return, and larger trusts have to satisfy security requirements such as a US bank trustee or a bond. The tax is deferred, not forgiven. It comes due on distributions of corpus during the spouse’s life and on whatever remains when the surviving spouse dies.

For most Canadian families the treaty credit is simpler and better. A QDOT means creating and administering a US trust, appointing a US trustee, filing Form 706-QDT, and living with a deferred US tax hanging over the surviving spouse for the rest of their life. The treaty credit is a computation on a return that is already being filed. The QDOT earns its keep where the US estate is large enough that the treaty credit cannot absorb the tax, or where the marital deduction has to shelter far more than the credit is worth.

What is a transfer certificate and why wait?

The transfer certificate, IRS Form 5173, is the document that tells a US bank, transfer agent, brokerage, or title company that the estate’s US federal transfer tax obligations are satisfied and the assets can be released. Until it issues, the custodian is exposed to personal liability for the tax, so it will not move. Accounts stay frozen, sales do not close, and the family waits.

This is where cross-border estates actually get stuck. The tax answer is often nil, thanks to the treaty. The paperwork answer takes a year. The IRS itself estimates 12 to 18 months from the time it receives all necessary documentation, and that clock starts after the return and supporting materials are complete, not on the date of death.

The submission looks different depending on whether a return was required. Where Form 706-NA was required, the estate submits a copy of the filed return with all schedules. Where no return was required because the estate was under the threshold, the executor submits the will and any codicils, the death certificate, any death or inheritance tax returns filed elsewhere, and an affidavit setting out the decedent’s birth and citizenship details, a complete list of US assets and values, and whether any US bank accounts were used in a business. Non-English documents need translations.

One exception is worth knowing about. A transfer certificate is not required for property being administered by an executor or administrator appointed, qualified, and acting within the United States. Ancillary US administration is its own cost and delay, so this is not automatically the faster path, but for an estate with a US property that has to be sold quickly it can be. Executors should also understand their own exposure here, which the guide to executor personal liability covers.

Practically, the sequencing advice is simple. Do not wait for the nine-month deadline to start gathering worldwide valuations, and do not distribute anything on the assumption the certificate is imminent. Tell the beneficiaries at the outset that the US portion of the estate is likely to be inaccessible for well over a year.

Should the estate elect alternate valuation?

The default is date-of-death value for everything. IRC 2032 lets the executor instead elect to value the whole estate six months after death, with anything sold, distributed, or exchanged in the interim valued as of that transaction date. It is an all-or-nothing election across the estate, not an asset-by-asset choice.

The election is heavily restricted. Under IRC 2032(c) it is only available if it decreases both the value of the gross estate and the net estate tax payable. That second condition is the one that disqualifies most Canadian estates. If the treaty credit already reduces the US tax to zero, a lower valuation cannot decrease the tax, so the election is unavailable no matter how far the market fell.

Timing is also unforgiving. The election has to be made on a return filed no later than one year after the due date including extensions, and once made it is generally irrevocable. An executor who files at nine months without considering it and watches the market drop afterward has a narrow window and then none.

There is also a cross-border wrinkle that runs the other direction. A lower US estate tax value does nothing for the Canadian side, where the deemed disposition happened at the moment of death and is locked to that date. And for a US beneficiary, the estate tax value is generally the basis that carries forward, so electing a lower value can reduce US estate tax while increasing a future capital gain. Run both before electing.

Which deductions survive the proration rule?

A non-resident estate does not get to deduct its debts and expenses in full. IRC 2106(a)(1) allows only the proportion of the funeral expenses, administration expenses, claims against the estate, and casualty losses that the US gross estate bears to the worldwide gross estate. It is the same fraction that drives the treaty credit, applied in the other direction.

So a $350,000 mortgage on a Florida condo held by an estate whose US assets are 15 percent of the worldwide total does not produce a $350,000 deduction. It produces $52,500. This catches executors who assume a non-recourse mortgage secured by the property itself should reduce that property’s value dollar for dollar. It does not, and the return has to show the gross value with the debt claimed separately as a prorated deduction.

Some deductions are not prorated. Charitable transfers under IRC 2106(a)(2) are allowed where the recipient is a qualifying US organization, subject to their own conditions. The marital deduction under IRC 2106(a)(3) follows the regular rules, which for a non-citizen spouse means QDOT or nothing, as covered above. And a debt that is specifically secured by and charged against US property may be treated differently from a general estate liability, so the character of the debt is worth establishing before the return is prepared.

All of it depends on the disclosure condition in IRC 2106(b). No worldwide gross estate on the return means no deductions at all, not merely a smaller fraction. That is the statutory answer, and it is another reason the “just report the condo” approach fails.

How does Canada’s deemed disposition interact?

Canada has no estate tax. Instead, ITA 70(5) deems the deceased to have disposed of every capital property immediately before death at fair market value, and the accrued gain lands on the terminal return. So the same Florida condo can produce a Canadian income tax on the growth since purchase and a US estate tax on the entire gross value, at the same moment, on two completely different bases.

The two taxes are not duplicates of each other and they do not offset cleanly. Canada is taxing appreciation. The US is taxing value. A condo bought for $600,000 and worth $610,000 at death produces almost no Canadian tax and a full US exposure on $610,000. A condo bought for $100,000 and worth $610,000 produces a large Canadian capital gain and the same US exposure. Nothing about the Canadian result tells you anything about the US result.

Article XXIX B(6) supplies the relief, and it runs one way. Canada allows a credit against Canadian tax for US federal and state estate or inheritance taxes paid in respect of US-situated property, applied against the Canadian tax on the income and gains from that property. Article XXIX B(7) provides the mirror for a US person holding Canadian property.

The relief falls short in a specific and predictable way. It is limited to the Canadian tax on income and gains from the US property. Where the accrued gain is small and the US estate tax is large, there is not enough Canadian tax on that property to absorb the credit, and the excess simply does not get used. Where a spousal rollover under ITA 70(6) defers the Canadian gain entirely, there may be no Canadian tax that year to credit against at all. The combination of a low-growth US property and a large US estate tax bill is exactly where the treaty credit machinery leaves the most residual double tax. The comparison of the deemed disposition against the US step-up works through the basis side.

What goes wrong most often on these returns?

The recurring failures are procedural, not technical. Estates miss the filing because they netted the mortgage against the property. They file without invoking the treaty and pay a tax they did not owe. They extend the filing and assume the payment was extended too. And they distribute Canadian assets before the US position is settled, which the executor pays for personally.

The full list worth checking against:

• Treating the $60,000 as a net-value test. It is gross, and it includes adjusted taxable gifts and the gift tax specific exemption.
• Missing US shares held in a Canadian account. The custodian’s country is irrelevant. Stock of a US corporation is US-situs wherever it sits.
• Counting a US money market fund as cash. It is a share in a US company, and it is inside the gross estate.
• Not claiming the treaty credit on the return. The IRS position is that the claim is made on a filed Form 706-NA with a statement showing the computation. It is not applied automatically.
• Skipping the worldwide disclosure. Without it there is no treaty fraction and no deductions under IRC 2106.
• Electing the QDOT and the treaty marital credit together. They are alternatives. Claiming the treaty credit requires waiving the marital deduction.
• Assuming Form 4768 extends the payment date. It does not, and interest runs from month nine regardless.
• Telling beneficiaries the money is coming soon. The transfer certificate is a 12 to 18 month process after the documentation is complete.
• Valuing US real property with a realtor letter. A defensible date-of-death appraisal is what supports the fraction that drives the credit.

On penalties: late filing runs at 5 percent of the tax due per month up to 25 percent under IRC 6651(a)(1), late payment at 0.5 percent per month up to a further 25 percent, and interest accrues separately from the original due date. Reasonable cause can abate the penalties. It does not touch the interest. And where the treaty reduces the tax to zero, the penalties are computed on zero, which is the one piece of good news in a late-filed Canadian estate return. The return still has to be filed, because the transfer certificate depends on it.

What should I do next?

Start with the inventory and the deadline. Everything else, including whether the estate owes anything at all, depends on knowing precisely what the decedent owned in the US on the date of death and what they owned everywhere else. These guides cover the surrounding pieces.

• The $60,000 US estate tax exemption for Canadians, how the default credit works and why the statute never says $60,000
• Deemed disposition at death vs the US step-up in basis, what each country does to the property’s cost base
• Executor personal liability in a cross-border estate, what the executor is on the hook for if assets are distributed early
• Cross-border estate planning with freezes and alter ego trusts, the structures that reduce exposure before death rather than after
• How a Canadian should hold a US vacation rental, the ownership decision that determines the estate tax outcome years later

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