Canada-U.S. Estate and Gift Tax Planning: Utilizing Canada-U.S. Income Tax Treaty Provisions to Mitigate Tax

Although there is no inheritance tax in Canada, taxes on income and capital gains are generally required to be paid at death, on gifting, and transfers to trusts. There are exemptions to mitigate these taxes, including an exemption for a principal residence and a lifetime capital gains exemption, $971,190 (2023), for qualifying property. Unlike many other countries, there is no Canada-U.S. Estate and Gift Tax Treaty. Instead, there are provisions in the Canada-U.S. Income Tax Treaty to mitigate double taxation on death for Canadian citizens residing in the U.S.

A Canadian resident is subject to U.S. estate tax on U.S. situs property, including U.S. real estate and stock owned in U.S. corporations. Under the income tax treaty, a Canadian resident is entitled to a pro-rata share of the U.S. unified credit calculated as a ratio of the deceased's U.S. assets over worldwide assets. In addition to the unified credit, a marital estate tax credit and the foreign tax credit are available to offset taxes payable or paid.

Tax practitioners working with taxpayers residing in both the U.S. and Canada need to take steps to circumvent and reduce transfer taxes paid by these taxpayers.

Listen as our astute panel of international tax planning experts explains estate and gift tax considerations in the U.S. and Canada for Canadians residing in the United States.