I got a call last spring from a client in tears. Her mother had passed away in Florida, leaving her a condo and some savings. She thought the worst was over—until the IRS sent a bill for U.S. estate tax, and then the CRA deemed the inheritance taxable income in Canada. Between the two countries, she was looking at losing nearly half of what her mom worked a lifetime to build. Stories like this are more common than you’d think, especially for Canadian families with ties south of the border.
Cross-border inheritance tax isn’t one single tax—it’s a tangle of rules from both sides that can catch you off guard if you’re not prepared. The good news? With the right planning, you can minimize or even eliminate much of the tax hit. Cross border tax advisor Toronto team at SAL Accounting sees these situations all the time, and this guide pulls together the practical steps that actually make a difference in 2026.
How Inheritance Is Taxed Differently in Canada vs. the U.S.
Canada and the U.S. handle inheritance in completely opposite ways, which is where most of the confusion (and double taxation risk) comes from.
Canada: No Inheritance or Estate Tax—But “Deemed Disposition”
When someone passes away in Canada, the CRA treats it as if the deceased sold all their assets at fair market value the day before death. Any capital gains are taxed on their final return. The heirs receive the assets with a stepped-up cost base, so they usually don’t pay tax when they eventually sell.
Example: Mom owns a cottage worth $800,000 (bought for $200,000). At death, $600,000 capital gain is taxed on her final return (at her marginal rate). Heirs inherit it at $800,000 cost base—no further tax unless it appreciates more.
U.S.: Federal Estate Tax (Plus Possible State Taxes)
The U.S. has a direct estate tax on worldwide assets for U.S. citizens/residents and U.S.-situs assets for non-residents. In 2025, the federal exemption is around US$13.61 million per person (adjusted for inflation), so most estates escape federal tax. But for non-U.S. citizens owning U.S. property (like a Florida condo), the exemption drops to just US$60,000.
Common U.S. assets that trigger this:
- U.S. real estate
- U.S. stocks/bonds (even in a brokerage account)
- U.S. business interests
Rates climb fast—up to 40% on amounts over the exemption.
The Big Pain Point: Double Taxation Risk
A Canadian inheriting U.S. assets can face:
- U.S. estate tax on the fair market value (if over US$60,000 for non-residents).
- Canadian capital gains tax on the “deemed disposition” in the deceased’s final return (if the deceased was Canadian).
- Potential Canadian income tax if the inheritance is treated as income (rare, but happens with some RRSPs/IRAs).
I had a client inherit a U.S. stock portfolio worth $450,000 from her American aunt. The U.S. estate paid tax on it, then Canada taxed the deemed gain on the aunt’s Canadian return (she was a dual citizen). Without planning, over 50% went to taxes.
Practical Strategies to Minimize Cross-Border Inheritance Tax
Here’s what actually works, based on cases we’ve handled:
1. Use the Canada-U.S. Tax Treaty
The treaty provides foreign tax credits so you’re not taxed twice on the same asset. U.S. estate tax paid can often be credited against Canadian capital gains tax on the deceased’s final return.
2. Proper Estate Planning on Both Sides
- U.S. citizens/residents with Canadian heirs: Use the marital credit and portability to maximize exemptions.
- Canadians owning U.S. property: Consider holding it in a Canadian corporation (blocks U.S. estate tax but triggers Canadian corporate tax—complex, needs advice).
- Life insurance: Proceeds are tax-free in Canada and often outside the U.S. taxable estate.
3. Claim Foreign Tax Credits Correctly
On the Canadian final return, claim a credit for U.S. estate tax paid. Timing matters—file U.S. Form 706-NA first to know the exact U.S. liability.
4. Spousal Rollovers and Trusts
Assets left to a surviving spouse roll over tax-free in Canada. Qualified Domestic Trusts (QDOT) can defer U.S. estate tax for non-citizen spouses.
5. Gifting While Alive
In Canada, gifts are taxed on deemed disposition (same as death). In the U.S., lifetime gifts use the annual exclusion (US$18,000 in 2025) without estate tax impact.
Families Who Saved (and One Who Didn’t) – Hypotethical Senario
The Condo That Cost $180,000 in Tax
A Vancouver family inherited a $900,000 Florida condo from their U.S. citizen father. No planning:
- U.S. estate tax on $840,000 (after $60,000 exemption) ≈ $300,000 USD
- Canada taxed deemed gain on father’s final return (he spent winters in Florida but was Canadian resident)
Total tax: over 50%. With earlier planning (QDOT + corporation), they could have cut it by 80%.
The Family That Paid Almost Nothing
Toronto parents (Canadian) owned a small Arizona rental. They transferred it to a Canadian corporation years earlier and bought life insurance to cover any Canadian deemed disposition tax. Heirs paid minimal tax.
Your 2026 Checklist: Don’t Leave It to Chance
If cross-border inheritance might affect your family:
- Review wills on both sides of the border.
- Calculate potential U.S. estate tax exposure (anything over US$60,000 for non-residents is at risk).
- Talk to advisors who understand both systems.
- Consider insurance or restructuring while everyone is healthy.
Final Thoughts: Plan Early, Save Big
Cross-border inheritance tax doesn’t have to wipe out what your family worked for. With the right structure—treaty credits, proper ownership, or insurance—you can protect most of it. But the rules are complicated and change often (exemptions, rates, treaty interpretations). One wrong assumption can cost tens or hundreds of thousands.
That’s where a cross border tax advisor Toronto makes all the difference. This team specializes in these exact situations—helping Canadian families keep more of their inheritance. Ready to protect what matters? Book a free consultation at SAL Accounting now.
📧 Email: tax@salaccounting.ca
📍 Location: 330 Bay St. Unit 1401, Toronto, ON M5J 0B6 | 55 Village Centre Pl, Suit 734, Mississauga, ON L4Z 1V9, Canada