US Estate Tax Basics
| Factor | Details |
|---|---|
| US estate tax rate | Up to 40% |
| US exemption (citizens/residents) | ~$13.61 million (2024) |
| Non-resident exemption (base) | $60,000 |
| Canada-US treaty | Provides relief for Canadians |
What Are US Situs Assets?
Subject to US Estate Tax
| Asset Type | US Situs? |
|---|---|
| US real estate | Yes |
| US stocks (directly held) | Yes |
| US corporate bonds | Yes |
| US branch bank accounts | Yes |
| Tangible property in US | Yes |
NOT US Situs
| Asset Type | US Situs? |
|---|---|
| US government bonds | No |
| US bank deposits (non-branch) | No |
| Canadian-listed ETFs (holding US stocks) | No |
| Life insurance on US policy | Generally no |
| US mutual funds (open-end) | Debatable (usually no) |
Canada-US Tax Treaty Relief
Prorated Exemption
The treaty allows Canadians to claim a prorated share of the US exemption based on worldwide assets.
| Formula | |
|---|---|
| Prorated exemption = | US exemption × (US situs assets ÷ worldwide estate) |
Example Calculation
| Factor | Amount |
|---|---|
| Worldwide estate | $3,000,000 |
| US situs assets | $600,000 |
| US exemption | $13,610,000 |
| Prorated exemption | $13.61M × ($600K ÷ $3M) = $2,722,000 |
| US situs assets | $600,000 |
| US estate tax | $0 (assets below prorated exemption) |
When Tax Applies
| Scenario | US Estate Tax |
|---|---|
| Small Canadian estate, modest US assets | Usually $0 |
| Large worldwide estate (>$13M) | Possible exposure |
| US assets exceed prorated exemption | Tax applies |
Thresholds and Risk Levels
Approximate Risk by Estate Size
| Worldwide Estate | US Assets | Likely Tax? |
|---|---|---|
| Under $1M | Any amount | No |
| $1-5M | Under $1M | Unlikely |
| $5-13M | Significant | Calculate carefully |
| Over $13M | Any | Likely exposure |
Reporting Requirements
IRS Forms on Death
| Form | Purpose | When Required |
|---|---|---|
| Form 706-NA | Non-resident estate tax return | US situs assets > $60,000 |
| Form 8833 | Treaty-based return position | To claim treaty exemption |
Even If No Tax Owed
| Requirement | Details |
|---|---|
| Filing may be required | If US assets > $60,000 |
| Purpose | Claim treaty benefits |
| Penalty for non-filing | Potential issues |
Strategies to Minimize Exposure
Strategy 1: Canadian-Listed ETFs
| Approach | Details |
|---|---|
| Instead of | US-listed VTI, VOO, SPY |
| Hold | Canadian-listed VUN, XUU, ZSP |
| Why it works | Canadian corporate structure |
| US situs? | No (Canadian asset) |
ETF Comparison
| US-Listed | Canadian Alternative | US Situs? |
|---|---|---|
| VTI | VUN | No (VUN) |
| SPY | ZSP | No (ZSP) |
| QQQ | ZQQ | No (ZQQ) |
| VEA | VIU | No (VIU) |
Strategy 2: Joint Ownership with Spouse
| Approach | Details |
|---|---|
| JTWROS | Joint tenants with right of survivorship |
| Effect | Only 50% included in estate |
| Benefit | Reduces US exposure |
| Caution | US rules complex, get advice |
Strategy 3: Life Insurance
| Approach | Details |
|---|---|
| Coverage | Equal to potential US estate tax |
| Benefit | Pays tax, heirs receive full value |
| Ownership | Consider ILIT for US citizens |
Strategy 4: Corporate Ownership (US Real Estate)
| Approach | Details |
|---|---|
| Hold through | Canadian corporation |
| Effect | Shares are Canadian situs |
| Complexity | Very high |
| Concerns | FIRPTA, double taxation, costs |
| Recommendation | Get specialized advice |
US Real Estate Considerations
Snowbird Properties
| Factor | Impact |
|---|---|
| US situs | Yes, always |
| Value included | Fair market value at death |
| Mortgage | Deductible from value |
| Treaty relief | Same prorating rules |
Example: Florida Condo
| Factor | Amount |
|---|---|
| Condo value | $500,000 |
| Mortgage | $200,000 |
| Net US situs | $300,000 |
| Worldwide estate | $2,000,000 |
| Prorated exemption | $2.04M |
| US estate tax | $0 |
Tax Credits
Avoiding Double Taxation
| Credit | Details |
|---|---|
| US provides credit for Canadian tax | On same assets |
| Canada provides credit for US estate tax | On final return |
| Treaty ensures | No double taxation |
Provincial Considerations
| Province | Impact |
|---|---|
| All provinces | Subject to same US rules |
| Quebec | Notarial wills, civil law differences |
| BC/Ontario | Higher probate may increase costs |
When to Get Help
| Situation | Action |
|---|---|
| US situs assets > $1M | Consult cross-border specialist |
| Worldwide estate > $5M | Estate planning essential |
| US real estate | Review ownership structure |
| US citizen spouse | Complex rules apply |