A Condo in Florida and an American Estate Tax Return: US Assets in a Canadian Estate

It is one of the more surprising sentences in Canadian estate planning: the United States can tax the estate of a person who was never American, never lived there, never worked there and never filed anything with the Internal Revenue Service. It does so because its estate tax is charged on assets located in the United States rather than on the residence of the person who owned them, and Canadians own a great many of those assets. A condominium in Florida. A cabin in Arizona. And the one almost nobody expects, shares of American companies held in an ordinary Canadian investment account. The good news is that for most Canadian estates the treaty relief is generous enough that no tax ends up payable. The complication is that the relief has to be claimed on a return that has to be filed, and the filing threshold is far lower than people expect. This article sets out what counts, what triggers a filing, what the treaty does, and where the popular workarounds create bigger problems than they solve.

What counts as a US situs asset

The rule is about location rather than about the owner. US situated assets include real estate in the United States, tangible property located there, and certain intangible property, of which the most important for Canadian families is US marketable securities.

That last category is the one that surprises people, so it is worth stating plainly. Shares of a corporation organised in the United States are US situs property no matter where the share certificate or the account is. Holding them through a Canadian brokerage does not change it. Holding them in a Canadian registered account does not change it either, which means a retirement account invested in American companies can carry exposure nobody has considered.

What is generally not US situs is worth knowing too, and this is where the ordinary planning lives. Units of a Canadian mutual fund or Canadian listed fund that itself holds US shares are generally not US situs property, because what is owned is an interest in a Canadian entity. That single distinction is the reason a great deal of cross border exposure is solved at the level of how an investment is held rather than what it invests in. Whether it applies to a particular holding is a question for a cross border professional.

The filing trigger, which is lower than people expect

A United States estate tax return is required for the estate of a nonresident who is not a US citizen where the value of US situated assets at death, together with adjusted taxable gifts, exceeds US $60,000.

That figure is not indexed and has not moved in a long time, and it is low enough that an ordinary situation crosses it easily. One modest condominium does. A holding of American shares accumulated over a working life does. Two or three American positions in a portfolio can, without the family ever having thought of themselves as owning American property.

It is important to separate two things at this point, because they get conflated and the conflation causes both unnecessary alarm and unnecessary silence. A filing obligation is not a tax liability. Many Canadian estates that must file end up owing nothing. But the relief that produces that result is claimed on the return, which means the return is how you get it, and an estate that does not file has not claimed anything.

What the treaty does

The Canada United States tax treaty provides relief that is specifically designed for this situation. In outline, the executor may claim a pro rata share of the unified credit that a United States person would receive, in the proportion that the US situated assets bear to the value of the deceased’s worldwide estate. It is claimed on the return with a treaty based return position disclosure.

The arithmetic of that has a consequence worth understanding. The credit is proportional, so the larger the worldwide estate relative to the US assets, the smaller the share of the credit. A person with a modest overall estate and a single US property will usually be well protected. A person with a very large worldwide estate and the same US property receives a proportionally smaller credit against the same US assets, which is the situation where tax actually arises.

The treaty provides other relief as well, including provisions relevant where property passes to a surviving spouse. Those are technical, they depend on the facts, and they are the reason this subject belongs with a cross border tax professional rather than with a general practitioner on either side of the border.

No credit or exemption amount appears on this page. Those figures are indexed and change, and a number printed here would be wrong within a year while reading as though it were settled.

The Canadian side of the same death

It is easy to focus on the American tax and forget that the Canadian one applies to the same property at the same moment. Canada treats the person as having disposed of their capital property immediately before death, so a US property that has appreciated produces a Canadian capital gain as well.

Where both apply, foreign tax credit mechanisms exist to prevent the same amount being taxed twice, and they are neither automatic nor simple. Getting them right requires the two returns to be prepared with each other in mind, which is an argument for one professional coordinating both rather than two professionals each solving half.

There is also a state layer that gets forgotten entirely. The state where the property sits has its own rules about how a non resident’s property is dealt with on death, which can mean a probate process in that state, in addition to anything happening in Canada. That is a cost and a delay, and it is the practical reason cross border families sometimes hold US property in a structure rather than personally.

The popular workarounds, and why several backfire

This is an area where confident advice circulates in golf clubs and Facebook groups, and where several of the popular structures create Canadian problems larger than the American problem they address.

Holding US real estate in a Canadian corporation is the classic example. It can address the US estate tax question and it can create a Canadian taxable benefit problem where the property is used personally by the shareholder, which is precisely what a vacation property is for. Families have discovered that years later, with interest.

Adding a child to the title has the same consequences it has on a Canadian property, in a foreign legal system, and adds a gift tax question that does not exist in Canada.

A properly structured trust can work, and it has to be established correctly and generally before the property is acquired, which means the person who wants to consider it needs advice before the purchase rather than after. Non recourse financing against the property is another recognised approach with its own conditions.

What all of these have in common is that they are cross border structures, and the failure mode is always the same: a structure that solves one country’s problem while creating another country’s. Nobody should implement any of them on the strength of a general article, this one included.

What to actually do

Start by finding out whether you have exposure at all, which most people have never checked. Add up US real estate at current value and US situs securities in every account including registered ones. If the total is anywhere near the filing threshold, you have something to look at.

If you do, get a cross border tax professional, once, before anything is bought, sold or restructured. This is a narrow specialty and it is worth paying for; it is also a specialty where a single consultation frequently resolves the question permanently for a family with an ordinary situation.

And where exposure is real and the property is intended to stay in the family, the liquidity question is the same one that runs through this whole silo: if tax is payable in a foreign currency on a foreign schedule, where does the money come from. Insurance is one answer among several and it should be considered alongside the others rather than presented as the solution. What matters is that the question is asked before it becomes an executor’s problem in a country they do not live in.

What this looks like from the executor’s desk

Everything above is written from the owner’s side. The person who has to act on it is the executor, often a spouse or an adult child, working a year after the funeral in a country they do not live in. What they meet there changes who you appoint.

The estate needs a United States identifying number before it can file anything, and obtaining one takes its own application and its own waiting time. The return runs to a deadline measured from the date of death, and an extension of time to file is not an extension of time to pay. The Internal Revenue Service publishes both.

Then comes the step nobody anticipates. A United States broker or a title company will frequently decline to release an account or close a sale until clearance has been obtained from the Internal Revenue Service. It takes months, and it can leave a family unable to sell the American property while the Canadian side of the estate waits.

The preparation is unglamorous. Leave a file naming the American assets and what each one cost. Appoint someone able to sign American paperwork. And read what an executor acting outside their own province already faces, because a foreign country adds another layer.

Frequently Asked Questions

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Read Deemed Disposition at Death for the Canadian tax that applies to the same property, The Principal Residence Exemption at Death for the relief that may or may not reach a second property, and The Estate Planning Checklist for where this fits in the sequence. The Succession Planning guide sets out the whole picture.