Inheriting Across the Border: Canada's Deemed Disposition, the US Estate Tax, and the Beneficiary on the Other Side

Canada and the United States tax death in different ways. Canada has no estate or inheritance tax; it treats death as a sale of all capital property at fair market value and taxes the deceased's gain on the final return. The US has no deemed disposition; it taxes the estate's value above an exemption and gives heirs a stepped-up basis. When a Canadian dies owning US assets, a US person dies owning Canadian assets, or an heir is on the other side of the border from the estate, the two systems apply simultaneously, and the treaty's Article XXIX B provides credits that reduce but do not always eliminate the overlap.

Full guides: A US Person Inherits From Canada: No US Tax on the Inheritance — but Form 3520 Reporting, Basis Questions, and What You Now Own · A Canadian Inherits From a US Estate: No Canadian Tax on the Inheritance, a Stepped-Up Cost Base, and the Paperwork the Estate Handles First

Key takeaways

• Canadian resident dies: all capital property is deemed sold at fair market value on the final T1; the gain is taxed; RRSPs and RRIFs are fully included as income unless rolled to a spouse. No Canadian estate or inheritance tax. Provincial probate fees apply.
• US citizen or resident dies: the estate pays US estate tax on worldwide assets above the exemption ($15 million from 2026), with an unlimited marital deduction for a US-citizen spouse; heirs receive stepped-up basis. No US income tax on the unrealized gain.
• Canadian dies with US assets: US estate tax applies to US-situs assets (real estate, US stocks, tangible property in the US) above $60,000, but the treaty prorates the full US exemption by the ratio of US-situs assets to worldwide assets, which eliminates the tax for most Canadians. Form 706-NA is required to claim it.
• US citizen dies in Canada: Canada's deemed disposition income tax and the US estate tax both apply; Article XXIX B allows a credit for the Canadian tax against the US estate tax on the same assets.
• Heir in the other country: the heir owes no tax on receipt in either country; a US-person heir reports inheritances above $100,000 from a foreign estate on Form 3520; a Canadian heir of an IRA or 401(k) faces US withholding on distributions.

A Canadian resident dies

The final return reports the deemed disposition of every capital asset at fair market value: the cottage, the portfolio, the private company shares. RRSP and RRIF balances are included as income in full unless transferred to a spouse or a financially dependent child. The estate pays the tax and the heirs take the assets at fair market value. Provincial probate fees (Ontario's estate administration tax is about 1.5% above $50,000) apply to probated assets.

If the deceased owned US assets, the US estate tax applies to the US-situs portion. The domestic US exemption for non-resident aliens is $60,000, which would catch any Canadian with a Florida condo, but Article XXIX B(8) of the treaty prorates the full US exemption: a Canadian with $500,000 of US assets in a $5 million worldwide estate gets 10% of the $15 million exemption, or $1.5 million, and owes no US estate tax. The estate must file Form 706-NA within nine months to claim the prorated exemption; without the filing, the $60,000 default applies.

A US person dies

The US estate tax applies to the worldwide estate above the exemption; a married couple can shelter $30 million with portability. Heirs take assets at fair market value as their basis. If the deceased was a US citizen living in Canada, Canada's deemed disposition applies to the worldwide estate as well, and the treaty allows the US estate tax computation to credit the Canadian income tax on the deemed disposition of the same assets. The two taxes are on different bases (value versus gain) and the credit is imperfect; estates with large unrealized gains and values near the exemption need the calculation done both ways.

The heir in the other country

US-person heir of a Canadian estate. No US income tax on the inheritance. Form 3520 is required if inheritances from a foreign estate exceed $100,000 in the year; the penalty for omission is 5% per month up to 25%. The heir's US basis in inherited property is fair market value at death. An inherited RRSP or RRIF paid to a US-person beneficiary is taxed to the Canadian estate (or the beneficiary in some cases) in Canada and is US-taxable income to the beneficiary with a foreign tax credit.

Canadian-resident heir of a US estate. No Canadian tax on receipt; the Canadian cost base is fair market value at death. An inherited IRA or 401(k) paid to a Canadian resident is subject to 30% US withholding, reduced to 15% under the treaty for periodic payments; lump sums stay at 30%. Canada taxes the distribution as income with a foreign tax credit for the US tax.

Canadian-resident executor of a US estate, or vice versa. An executor who distributes before clearing both countries' tax authorities is personally liable for the tax. Canada issues a clearance certificate on Form TX19; the US closes the estate through the Form 706 process.

Worked example

A Toronto widow dies owning a $1.2 million Toronto home, a $900,000 portfolio with $400,000 of unrealized gain, a $600,000 RRIF, and a $450,000 Naples condo, leaving everything to a daughter in Miami.

• Canada. Deemed disposition: home sheltered by the principal residence exemption; portfolio gain $400,000, $200,000 taxable; RRIF $600,000 included in full. Final-return tax roughly $400,000. Ontario probate about $47,000.
• US estate tax. US-situs assets $450,000 of a $3.15 million worldwide estate: 14.3% of the $15 million exemption is about $2.1 million; no US estate tax. Form 706-NA filed within nine months to claim it.
• Daughter. No US income tax on the inheritance; Form 3520 for inheritances above $100,000; US basis in the condo and portfolio at date-of-death value.

Official sources

"An executor for a nonresident, not a citizen of the U.S. must file an estate tax return, Form 706-NA, United States Estate (and Generation-Skipping) Tax Return, Estate of a nonresident not a citizen of the United States, if the fair market value at death of the decedent's U.S.-situated assets exceeds $60,000." — Internal Revenue Service, Estate tax for nonresidents not citizens of the United States, https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax-for-nonresidents-not-citizens-of-the-united-states

"Capital property (such as real estate, investments, or personal belongings) owned by the person who died is considered to be disposed of by that person immediately before their death at fair market value." — Canada Revenue Agency, Taxable capital gains on property, investments, and belongings, https://www.canada.ca/en/revenue-agency/services/tax/individuals/life-events/doing-taxes-someone-died/prepare-returns/report-income/capital-gains.html

"U.S. persons and executors of estates of U.S. decedents file Form 3520 to report: Certain transactions with foreign trusts. Ownership of foreign trusts under the rules of sections Internal Revenue Code 671 through 679. Receipt of certain large gifts or bequests from certain foreign persons." — Internal Revenue Service, About Form 3520, https://www.irs.gov/forms-pubs/about-form-3520

Practitioner note

The Form 706-NA is the filing Canadian estates most often skip, because the executor sees a $60,000 threshold and assumes the condo is taxable. It is not, once the treaty proration is claimed, but the proration has to be claimed on a return filed within nine months. And on the heir's side, the Form 3520 penalty for an unreported Canadian inheritance is the most expensive paperwork failure in cross-border practice.

See also: Planning a full move? Start with the Canada-to-US tax checklist and browse every corridor by city, province, and state.

Next step

Fairlight prepares the Canadian final return and clearance certificate, the Form 706-NA with the treaty proration, and the heir's Form 3520 and basis documentation. See cross-border pricing or book a call.