Deemed Disposition at Death vs the US Stepped-Up Basis: Two Systems, One Estate, and Where They Collide

Canada and the US resolved the same problem — untaxed gains accumulating until death — in opposite ways. Canada has no estate tax; instead, the deceased is deemed to have sold all capital property at fair market value immediately before death, and the accrued gain lands on the final return as income tax, unless the property rolls at cost to a spouse or qualifying spousal trust. The US does the reverse: no income tax on the accrued gain at death — the heir takes a stepped-up basis equal to date-of-death value — but the estate itself may owe estate tax on its total value above the exemption. A person subject to only one system gets a coherent result. A person subject to both — a US citizen resident in Canada, or a Canadian with US-situs assets — can face Canadian income tax on the gain and US estate tax on the value of the same asset in the same year, and the two are different taxes that do not credit against each other automatically. Treaty Article XXIX B exists for exactly this collision.

Key takeaways

• Canada at death: deemed disposition of capital property at fair market value on the final T1; 50% of the gain is taxable at the deceased's marginal rate; spousal rollover defers it; no tax on the estate's value as such.
• US at death: no income tax on accrued gains; heirs take a fair-market-value basis (step-up — or step-down for loss property); estate tax applies to a US citizen's worldwide estate above the exemption ($15 million per person for 2026 under the 2025 legislation, indexed), and to a non-citizen non-resident's US-situated assets above $60,000, subject to treaty relief.
• The overlap cases: a US citizen in Canada gets both regimes on worldwide assets; a Canadian resident with a Florida condo or US stocks gets the Canadian deemed disposition on everything plus US estate tax exposure on the US-situs slice.
• Article XXIX B coordinates them: a pro-rated unified credit for the Canadian resident's US estate tax, a marital credit on top of it, and a credit mechanism between the US estate tax and the Canadian income tax triggered by the same death.
• Basis for the heirs diverges: for Canadian purposes the heir's cost is the deemed-disposition value; for US purposes a US-person heir generally takes date-of-death value for inherited property. The values are usually the same number — but the currencies, valuation dates for alternate valuation, and property that rolled to a spouse at cost in Canada (no Canadian step-up) while stepping up for US purposes create mismatches that surface when the heir eventually sells.

The spousal rollover is where the systems desynchronize

Canada's spousal rollover transfers property at cost — no tax at the first death, and the survivor inherits the low basis. The US step-up has no such deferral condition: property included in a US-citizen decedent's estate steps up whether or not tax was paid. So when a US-citizen husband dies in Canada leaving stock to his Canadian wife, Canada rolls it at cost (gain deferred to her death) while the US steps up the basis in her hands if she is a US person. Her Canadian gain on a later sale is measured from his original cost; her US gain from date-of-death value. The foreign tax credit on that sale becomes an exercise in mismatched gains — Canadian tax on a large gain, US tax on a small one — and the credit is limited to the US tax on the same income.

Electing out of the rollover

The Canadian executor can elect out of the spousal rollover asset by asset, triggering the gain on the final return deliberately: to use the deceased's capital losses, the lifetime capital gains exemption on qualifying shares, or low final-year brackets, and to hand the survivor a high cost base that matches the US step-up. In a cross-border estate the election is the synchronization tool — it aligns the Canadian cost base with the US basis and prevents the same gain from being taxed to the survivor in Canada after it vanished for US purposes.

Worked example

A US citizen dies resident in BC holding a Vancouver rental (cost $500,000, value $1.4 million) and a US brokerage account (cost $200,000, value $600,000), everything to his Canadian (non-US) wife. Canada: spousal rollover available on both — no deemed-disposition tax now, wife takes $500,000 and $200,000 cost bases. US: his worldwide estate of $2 million is far under the exemption — no estate tax; but property passing to a non-citizen spouse gets no marital deduction without a QDOT, which is irrelevant here only because no tax is due. The executor elects out of the rollover on the rental: the final T1 reports a $900,000 gain (about $450,000 taxable), taxed at graduated final-year rates, and the wife's Canadian cost base becomes $1.4 million. Had he instead rolled everything and the wife sold the rental a year later for $1.45 million, she would owe Canadian tax on a $950,000 gain with no US-side step-up to her (she is not a US person, so no US tax and no credit question) — the election-out simply chose the deceased's rates and a clean basis over her future rates.

Official sources

The CRA explains that when a person dies, they are considered to have disposed of their capital property immediately before death at fair market value, with the resulting gains reported on the final return, and that property that passes to a surviving spouse or a qualifying spousal trust can instead transfer at cost. — Canada Revenue Agency, Doing taxes for someone who died, https://www.canada.ca/en/revenue-agency/services/tax/individuals/life-events/doing-taxes-someone-died.html

The IRS explains that basis is generally the cost of property, adjusted for improvements, depreciation, and other items, and that inherited property generally takes a basis equal to fair market value at the date of death. — Internal Revenue Service, Topic No. 703, Basis of Assets, https://www.irs.gov/taxtopics/tc703

Article XXIX B provides relief from double taxation at death, including a pro-rated unified credit for a Canadian-resident decedent — the credit "reduced by the proportion of the unified credit... as the value of property situated in the United States bears to the value of his worldwide estate" — an additional marital credit for property passing to a surviving spouse, and foreign tax credit coordination between the US estate tax and Canadian income tax arising on death. — Canada-United States Tax Convention, Article XXIX B, https://www.canada.ca/en/department-finance/programs/tax-policy/tax-treaties/country/united-states-america-convention-consolidated-1980-1983-1984-1995-1997.html

Practitioner note

The two systems are mirror images, and the planning is choosing which mirror each asset faces: roll or elect out in Canada, and track two basis ledgers for every US-person heir from the day of death. The file we build at the first meeting is a schedule with four columns per asset — Canadian cost, Canadian value at death, US basis, US value — because every downstream return in both countries reads off that schedule.

See also: For the Form 706-NA guide for Canadians, see the Form 706-NA guide for Canadians; and browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight prepares the death-year returns on both sides, the rollover and election-out analysis asset by asset, and the dual-basis schedule the heirs will need when they sell. See cross-border pricing or book a call.