Tax Insights: Estate tax update – Owning a US vacation home

Issue 2014-04

The estate of a Canadian resident may be required to pay US estate tax on a US vacation home owned by the deceased. However, the Canada-US Tax Treaty (the Treaty) provides some relief. As a result, Canadian residents will now have a US estate tax liability only if their worldwide assets are valued at more than US $5.34 million.

While US estate tax applies to other US assets, such as US securities, this Tax Insights discusses the estate tax only as it applies to US real estate. All amounts are in US dollars.

This Tax Insights applies to personal-use properties only. If you own a US rental property, other considerations should be taken into account.

If you own a US property, you will be required to pay US estate tax based on the fair market value of the property at the date of your death. Estate tax rates start at 18% and reach 40% for properties worth more than $1,000,000.

You can reduce your estate tax liability by claiming a tax credit (referred to as the unified credit) equal to the greater of:

  • $13,000
  • $2,081,800 x the value of your US assets ÷ your worldwide assets

Therefore, if your US home accounts for 15% of the value of your worldwide estate, you will be entitled to a unified credit of $312,270 ($2,081,800 x 15%).

An additional credit is available if the US property passes to a Canadian spouse. The good news is that in many cases these tax credits will eliminate the US estate tax liability. The estate may still be required to file a US estate tax return to claim the credits provided in the Treaty.