Although the US estate tax exemptions are higher than ever, specific rules apply to Canadians owning property considered to be located in the United States. While some property considered located in the United States (e.g., US real property and personal property like cars, boats, household furnishings, and the like) may seem obvious, many Canadians are surprised to learn that other property, such as stocks in US companies—even if held in registered retirement savings plans (RRSPs)—are considered to be located in the United States for estate tax purposes.
Currently, the top US estate tax rate is 40 percent of the value of the property as of date of death. As you can imagine, this can result in a significant tax bill, particularly for Canadians with valuable US real estate, large RRSPs, or other certain property considered to be US situs assets. US tax law shelters only US$60,000 from estate taxation for nonresident Canadian citizens owning property located in the United States. The Canada-US Tax Treaty offers Canadians an increased estate tax exemption that may reduce or eliminate any estate tax due to the United States. However, qualifying for the increased estate tax exemption under the treaty is intrusive, burdensome, and expensive.
The increased exemption available to Canadians under the treaty in 2023 is calculated as follows:
(US situs assets ÷ worldwide assets) × US$12.92 million
(Note that in 2026, the US estate tax exemption is set to be reduced to only US$5 million indexed for inflation.)
Consequently, a Canadian resident with less than US$12.92 million in worldwide assets in 2023 will not incur any US estate tax (this number will be cut approximately in half in 2026). In addition, the increased estate tax exemption available under the treaty can be doubled if property is left to a surviving spouse. This all sounds really great, right? Well, yes and no. It is great that, under the treaty, US estate tax can be eliminated for many Canadian residents owning property in the United States. But, as referenced above, qualifying for the increased exemption that eliminates US estate tax is more complicated than it appears.
In order to qualify for the increased estate tax exemption under the treaty, the executor of the estate must file Form 706-NA (US nonresident estate tax return) with the US Internal Revenue Service (IRS).
Filing Form 706-NA requires the following:
- Preparation and filing within nine months of death (unless a six-month extension is granted by the IRS)
- Complete and accurate disclosure of all worldwide assets
- Providing US dollar value of each individual asset (per US tax rules and regulations) as of date of death
- Establishing that the US dollar values of certain assets are accurate by attaching valuations prepared by certified, credentialed appraisers
- Establishing that the US dollar values of other assets are accurate by attaching exhibits showing the US dollar values as of date of death
Consider a simplified scenario in which a Canadian couple owns a Florida residence worth US$300,000 in the husband’s name alone and RRSPs each worth US$500,000 holding US stocks worth US$200,000 each. Further, assume that the couple owns a business, a home, and other assets all in Canada. If the husband dies first, he will be considered the owner of US$500,000 in US situs assets.
This is well below the US$12.92 million that can be excluded from estate taxation under the treaty. Without the treaty credit, his estate will be taxed on the value of his estate exceeding US$60,000, and the estate tax liability in 2023 would be approximately US$176,000. In order to eliminate this estate tax, Form 706-NA must be filed. In order to file Form 706-NA, certified valuations of all of the Canadian-based assets (business, home, Canadian assets in RRSPs, and other assets) as well as all of the US assets (Florida home and US stocks in RRSPs) will need to be obtained. In addition, a cross-border attorney or accounting firm will need to be retained to prepare and file Form 706-NA. Finally, an attorney admitted to practice in Florida will need to be retained to probate the will of the decedent and run an estate administration in order to transfer the Florida property.
While filing Form 706-NA offers many Canadian residents relief from US estate taxation by qualifying for the increased exemptions under the treaty, relying on filing it in order to get that relief can be more costly than one might imagine. Obtaining proper valuations is expensive, time consuming, and intrusive. Undervaluing assets on the form can result in significant penalties. Failing to file the form can result in many problems for the decedent’s estate, executor, and beneficiaries. Penalties and interest would accrue on any unpaid tax, and US property could be characterized by the IRS as having no basis. As a result, on the sale of a zero-basis asset, capital gains tax will be due on the full proceeds of the sale.
In summary, Canadians owning property considered to be located in the Unite States with a value in excess of US$60,000 are advised to closely examine the US estate tax consequences of owing that property. How can the problems of owning property considered to be located in the United States be solved for Canadian nonresidents so they won’t be faced with filing Form 706-NA and all of the expense, intrusion, and burdens that come with it? There are a number of ways to own US property that will block US estate tax, including certain types of trusts, partnerships, and corporations. The type of entity that is most appropriate for any particular Canadian nonresident is highly dependent on the specific facts and circumstances of the taxpayer(s).
If you would like to determine whether you have any exposure to US estate tax and how you might reduce or eliminate that exposure, please contact David Luzon, partner, at dluzon@barclaydamon.com, or another member of the firm’s Canada-US Cross-Border Team or Trusts & Estates Practice Area.