This was republished with permission from the STEP Journal. Click to access the publication.
Private clients investing in US-situs assets, such as interests in US real property or stock of a US corporation, take particular care to ensure that their investments are structured in a tax-efficient manner. For many clients, ensuring that their chosen structure protects against the application of US estate tax (generally 40 per cent) is of primary importance. As a result, these individuals commonly use vehicles such as irrevocable trusts or non-US entities to hold title to their US-situs assets to avoid US federal estate tax upon their death. There are also many non-tax advantages to using trusts or companies to hold assets, such as succession planning, probate avoidance, consolidation of control and creditor protection.
US citizens and residents now enjoy a USD15 million estate tax exemption amount (the USD15 million Exemption). This amount is for deaths in 2026, but the figure is indexed for inflation for subsequent years. Non-US citizens (who are not domiciled in the US) still benefit only from a USD60,000 estate tax exemption amount. The USD15 million Exemption became permanent, in the sense that it does not automatically expire as written, under the new US tax legislation passed in 2025 known as the One Big Beautiful Bill Act. However, the relatively de minimis USD60,000 exemption for non-residents was not changed and is not indexed for inflation.
Nevertheless, residents of Canada, among other countries, can effectively increase their exemption amounts by claiming benefits under US estate tax treaties. Given the extremely low USD60,000 exemption amount for non-residents, this significantly benefits individuals who do not use a trust or company structure to hold US-situs assets for various reasons.
The US–Canada Income Tax Treaty (the Treaty) provides an extremely useful estate tax exemption for Canadian residents, which is based on the USD15 million Exemption otherwise applicable to US citizens and residents. Nominally, the Treaty is an income tax treaty because the US and Canada have different methods for imposing tax upon an individual’s death. The US imposes an estate tax, while Canada imposes an income tax on gains that are deemed realized at death.
Under the Treaty (art. XXIX.B.2), in determining the US estate tax of a Canadian-resident individual (other than a US citizen), the estate is entitled to a pro rata unified credit equal to the product of:
- the credit otherwise available to a US citizen (the credit equivalent of the USD15 million Exemption);
- multiplied by a fraction;
- the numerator of which is the value of the US-situs assets; and
- the denominator of which is the total value of the worldwide estate.
For example, a Canadian-resident decedent with USD5 million of US real estate and USD10 million of non-US-situs assets can utilize the equivalent of a USD5 million estate tax exemption amount, thereby reducing net US estate tax to zero. Mathematically, this means that, for estates under the USD15 million Exemption (determined on a worldwide basis), the Treaty generally eliminates all US estate tax. This is not necessarily the case for worldwide estates greater than USD15 million.
However, for certain married couples, even if the worldwide estate exceeds the USD15 million Exemption, property passing to a surviving spouse may be eligible for an additional estate tax marital credit (in lieu of a marital deduction) under the Treaty. Under the Treaty (art. XXIX.B.3), this marital credit is essentially equal to the lesser of:
- the pro rata unified credit (described above); and
- the amount of US estate tax that would otherwise be imposed on the transfer of the property passing to the spouse. To be eligible, the decedent and surviving spouse must meet certain US and Canadian citizenship and/or residency requirements, and certain elections and tax filings must be made.
Accordingly, while the One Big Beautiful Bill Act modified and increased the USD15 million Exemption, through the application of the Treaty Canadians indirectly share the benefit. While use of the Treaty may obviate the need for advance planning in some cases, there are still many situations in which Canadians can utilize the Treaty while also engaging in planning to help avoid probate and achieve other tax and non-tax goals for their families and beneficiaries.
