Denika Heaton, BBA, JD, TEP, CEA Senior Counsel, Tax & Estate Planning, Private Wealth
Chris Hanley, CPA, CA, CFP®, TEP Senior Tax Planner, Tax & Estate Planning, Private Wealth

Key Takeaways

• U.S. persons living in Canada face two tax systems. U.S. citizens and green card holders are taxed on worldwide income. Common Canadian strategies, such as TFSAs, RESPs, and Canadian mutual funds, may receive unfavourable U.S. tax treatment, and missed filings can lead to steep penalties.
• Your family's U.S. status matters, too. The U.S. status of your executors, attorneys, and beneficiaries can affect how your estate is taxed and administered.
• Canadians who aren't U.S. persons can still face U.S. estate tax. U.S. real estate and U.S. securities may be exposed to U.S. estate tax of up to 40%, and a U.S. filing obligation can arise well below the level at which tax is payable.
• How you own U.S. property and how long you stay in the U.S. both matter. Ownership structures, rental income, property sales, and your U.S. day count all carry tax consequences that are best addressed before you act.
• Planning ahead makes the difference. With coordinated Canadian and U.S. advice, these issues can be managed well before they become expensive surprises.
   

The United States taxes its citizens and green card holders on their worldwide income, no matter where they live. That’s why it’s important to confirm whether you are considered a U.S. person for tax purposes. This status can arise from:

• being born in the United States;

• inheriting citizenship through a U.S. parent (U.S. citizenship can pass to children born outside of the United States if the U.S. citizen parent met the required physical presence in the United States prior to the child’s birth); 

• Holding a long forgotten green card that was never formally given up.

If you are a U.S. person, several planning strategies that are common for Canadians may need to be reconsidered. For example, certain Canadian tax-favourable accounts, such as TFSAs and RESPs, may receive unfavourable treatment for U.S. tax purposes. You also have an obligation to generally report and disclose all foreign (non-U.S.) assets to the Internal Revenue Service. Canadian mutual funds and ETFs can also lead to adverse U.S. tax treatment and costly annual reporting requirements, so your investments may need to be reviewed to align with the U.S. tax regime. 

Transactions that are tax free in Canada, such as the sale of a principal residence, may catch you off-guard by attracting U.S. tax. Currency fluctuations between the Canadian and the U.S. dollar can also create unexpected tax results when you report the same transactions on both tax returns. Owning a Canadian private company, such as a family business, adds another layer of complex U.S. filing obligations, as well as possible tax mismatches and double taxation between the two countries.

The good news is that, in many cases, the greater burden is compliance rather than additional tax, since foreign tax credits can often help mitigate double taxation. However, omissions in U.S. tax reporting, including informational reporting, can attract severe and punitive tax penalties, which often apply to each omission for each year. Because the two tax systems don’t often align and simple missteps can trigger hefty penalties, it’s wise to seek cross-border tax advice. 

It’s not enough to consider whether you are a U.S. person. The tax status of your loved ones matters as well. The U.S. status of the people you appoint in your Power of Attorney or Will, and of those you plan to leave assets to, whether outright or through a trust, can have a significant impact on your planning. It is often preferable to appoint a Canadian resident executor who is not a U.S. person. Naming a U.S. person or a non-resident executor can create adverse tax consequences, including the possibility that your estate could be treated as non-resident for Canadian tax purposes.

Canadian trusts, including those created under a Will, are generally considered foreign trusts for U.S. tax purposes. This means that a U.S. person beneficiary, whether living in Canada or the United States, may take on ongoing U.S. reporting obligations simply by having an interest in your Canadian trust. In addition, distributions of income accumulated in prior years may be subject to punishing and unfavourable U.S. tax treatment. 

If a family member moves to the United States or is, or becomes, a U.S. person, let your tax and legal counsel know so they can determine whether your estate planning should be updated.

U.S. estate tax exposure for U.S. persons living in Canada

U.S. estate and gift taxes generally apply to U.S. persons’ worldwide assets transferred at death or during their lifetime. The U.S. basic exclusion amount is currently $15 million USD (indexed after 2025, but subject to change based on the political landscape). Lifetime cumulative gifts or an estate exceeding this amount can be subject to a progressive rate U.S. estate tax, with a top tax rate of 40%. Lifetime gifts (above the annual exemption amounts outlined below) use up this exemption and reduce the amount available at death. 

U.S. persons also have annual exemption amounts that don’t affect their lifetime basic exclusion.  U.S. persons can currently give $19,000 USD per recipient each year. The annual exclusion for gifts to a spouse who is not a U.S. citizen is currently $194,000 USD, while gifts to a U.S.-citizen spouse generally qualify for an unlimited marital deduction. Because exceptions and tax laws can change, planning should be reviewed with U.S. tax counsel.

Renouncing U.S. Citizenship

If you don’t expect to move and live in the United States, renouncing U.S. citizenship may simplify your tax reporting and reduce potential tax mismatches or double taxation. However, it is a complex process with significant legal and tax consequences.

Renunciation requires an in-person appointment at a U.S. embassy or consulate outside the United States, as well as bringing your U.S. tax compliance up to date and completing the required tax filings. “Covered expatriate” status can trigger an exit tax for you along with potential tax consequences for U.S. persons who later receive gifts or inheritances from you. Pre-expatriation tax planning is essential.

After renunciation, U.S. tax generally no longer applies to your worldwide income, although U.S.-source income and certain U.S. assets may remain taxable. A Certificate of Loss of Nationality confirms the loss of citizenship and may be requested by Canadian financial institutions.

Before proceeding, consult U.S. cross-border tax counsel to weigh the benefits, risks, and costs.  Those wishing to formally give up their long-held U.S. green card may take a similar step. 

Medical emergencies and impacts of incapacity when there is a foreign connection

Estate and incapacity documents are governed by local law. Your Canadian Will and incapacity planning documents, such as a Power of Attorney for financial decisions and your province’s equivalent for health care decisions in the event of incapacity, may not be recognized by U.S. hospitals, banks, or land registry offices. This can create delays for the loved ones responsible for making financial and medical decisions on your behalf and administering your U.S. assets. 

Even if there is technically reciprocity between the laws of your home province and the U.S. state where you spend time or own property, local health care providers, financial institutions, or government agencies may not honour it. Ideally, your incapacity documents should follow the same format that the foreign jurisdiction is used to accepting. This matters for anyone spending significant time in the United States whether or not they are a U.S. person, or  own property there, because a medical crisis can happen to anyone. 

If you spend significant time in the United States (or any foreign jurisdiction), discuss local equivalent incapacity planning documents with your cross-border legal counsel. Your Canadian and cross-border counsel should work together on these documents to prevent any unintended overlap in drafting. 

U.S. estate tax exposure for Canadians 

Canadian residents who are not U.S. Persons are subject to U.S. estate tax of up to 40% on the value of their U.S. situs assets, such as U.S. real estate or U.S. stocks and bonds (whether held in registered or non-registered accounts), if their worldwide estate exceeds the U.S. basic exclusion amount of $15 million USD (indexed after 2025, but also subject to change based on the political landscape). The Canada–U.S. Tax Treaty may provide some relief, but differences in how each country taxes assets at death can lead to significant tax costs without proper planning. 

Moreover, the Treaty only covers the federal U.S. tax obligations. Different succession or estate tax rules may apply at the state level where any real property is located. 

Keep in mind that a U.S. estate tax filing obligation can arise at a much lower value of U.S. assets than the level at which tax is actually payable. An outstanding U.S. filing can delay the sale or transfer of those assets for the family left behind.

Canadians owning U.S. real estate

Canadians can hold U.S. real estate through many ownership structures, including personal ownership, joint tenancy, corporations, and trusts.  Each has different consequences on both sides of the border, and changing the ownership structure later may be difficult and costly, especially if the property has gone up in value.

A structure that works for your Canadian planning may have negative implications for U.S. planning. For example, joint ownership between spouses is often recommended in Canada for provincial probate planning and administrative simplicity. For U.S. estate tax purposes, however, it can have negative consequences, especially for non-U.S. persons. The full value of the property may be included in the first owner’s estate, and then again in the survivor’s estate, exposing it to U.S. estate tax twice. Similarly, adding an adult child to the joint title may be treated as a gift for U.S. gift taxes and considered a disposition for Canadian capital gains tax purposes. 

When choosing an ownership structure, consider your family’s objectives, your overall assets in each country, and the source of the funds used to buy the property, among other factors. Ideally, these decisions should be made well before you make an offer. 

Canadians with U.S. tax filing obligations

If you earn income in the United States or sell U.S. property, you will likely need to file a U.S. tax return, even as a non-U.S. person. You would also need to report the same transactions, adjusted for currency, on your Canadian tax return, where any U.S. foreign tax credit may shelter some or all of the Canadian tax.

If you rent out a U.S. property, it’s important to understand your filing obligations, including any state and local or county taxes, whether or not the rental generates a net profit. 

Before listing a U.S. property for sale, understand that U.S. federal, and possibly state, withholding generally applies to the gross sale price, unless you plan in advance. Reduced withholding can often be arranged, but only by making a timely application and only if you already have a U.S. taxpayer identification number, which takes time to obtain.

If you spend significant time south of the border, the substantial presence test may determine you to be a U.S. tax resident. This test looks at the number of days you spend in the U.S. using a rolling average calculation over the current and two prior years. Note that the tests for tax residency differ from rules used for immigration purposes. 

Meeting this substantial presence test generally means you become subject to U.S. tax and reporting obligations on worldwide income, unless an exception applies. The closer connection exception may apply if you spend fewer than 183 days in the U.S. during the current year, maintain a tax home in Canada, and can show stronger personal and economic ties to Canada. These ties include your home, family, business interests, and social connections. Track your U.S. day count carefully and maintain strong Canadian ties, particularly since retirement may change your travel patterns and lessen your ties to your community in Canada.

Canadians moving to the United States 

Whether you have ceased to be a Canadian tax resident is a question of fact, not intention. Keeping good documentation and getting property advice in advance are both important.

Leaving Canada triggers a deemed disposition of most assets, meaning tax is payable on the gains as though you had sold them. Some assets are excluded, and elections are available to defer payments by posting security. Your advisors can help you determine which rules apply to your situation. It often makes sense to restructure or liquidate certain assets, so planning the timing and sequence of transactions before you leave matters. 

The same applies to children who move for school or work. A temporary move can eventually become a permanent U.S. tax profile, so getting proper advice along the way is critical to avoiding surprises.

Proactive planning – the key takeaway 

None of this is a reason to avoid owning U.S. property, investing in U.S. markets, or celebrating when your children find opportunity abroad. Every one of these issues can be addressed with proper planning in advance. A cross-border connection usually means something good has happened in a family. Planning is how you keep it that way.