Tax Insights: 2025 Estate tax update ─ Canadians owning a US vacation home

Issue 2025-45

In brief

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 have a US estate tax liability only if their worldwide assets are valued at more than $13.99 million in 2025, or $15 million for tax years after December 31, 2025.¹

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. If you own a US rental property, other considerations should be taken into account. All amounts are stated in US dollars.

In detail

How is US estate tax calculated?

If you own a US real estate 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 million.

For 2025, 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
• $5,541,800² x (value of US assets ÷ value of worldwide assets)

Therefore, if your US vacation home accounts for 10% of the value of your worldwide assets, you will be entitled to a unified credit of $554,180 ($5,541,800 x 10%).

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

Example: The $1 million+ property

Consider Steve and Michelle, married and residents of Canada (neither are US citizens). Steve owns a Florida home worth $2 million. His worldwide assets are worth $20 million. Steve’s estate tax liability on the Florida property, before any tax credits, is $745,800.

If the property passes to Michelle on Steve’s death, the treaty provides further tax relief, through the marital credit, equal to the lesser of the unified credit and the amount of the estate tax. As the calculation below shows, the marital credit is sufficient to eliminate Steve’s US estate tax liability.

Additional examples are shown in the table below:

Canadian tax implications

US estate tax payable on death of an individual is often greater than the corresponding Canadian tax. On death, a taxpayer will pay Canadian income tax on the accrued capital gain on a US vacation home and will also be subject to US estate tax on the value of the property. A Canadian foreign tax credit will be available for US estate tax paid on the US property.³

Because Canadian capital gains tax rates are significantly lower than the top US estate tax rate and Canadian tax applies only to the gain in the property (rather than its fair market value), the estate will likely pay tax at the US estate tax rate. In addition, the provinces and territories generally do not allow a foreign tax credit for US estate tax paid and, as a result, the deceased may be subject to some double taxation.

Ownership options to reduce tax exposure

Personal ownership

Personal ownership of a US vacation home may be appropriate if the estate tax liability can be managed or eliminated through the credits available under the treaty. In the case of a married couple, to maximize the unified credit available under the treaty, the best approach may be to put ownership in the hands of the spouse with the lower net worth. However, Canadian income tax attribution rules have implications that should be considered.

If the home is owned personally, the owner’s will may need to be changed. For example, if Steve’s Florida property passes to Michelle under his will, she may be exposed to US estate tax on her death. Instead, a properly structured spousal trust, created under Steve’s will, could protect Michelle from US estate tax.

Even if the US estate tax exposure cannot be fully eliminated, it might be possible to obtain additional life insurance to cover the estimated US estate tax. However, the value of the life insurance policy will increase the value of an individual’s worldwide estate and worldwide net worth for US estate tax purposes, which could potentially result in a higher US estate tax payable on death. Nonetheless, utilizing life insurance may be the simplest solution, particularly if the individual is young and has access to low‑cost insurance.

Personal ownership in joint tenancy

Many Canadian couples hold real estate property in joint tenancy. However, joint tenancies between spouses who are not US citizens can cause US gift and estate tax problems.

For US estate tax purposes, 100% of the value of the property is included in the estate of the first spouse to die, unless the executor can prove that the surviving spouse contributed funds towards the purchase of the property. For Canadian tax purposes, no deemed disposition will occur until the death of the surviving spouse. If US estate taxes are owing at the time of the first spouse’s death, this can result in foreign tax credit mismatch issues. From a probate standpoint, joint tenancy enables the surviving spouse to automatically inherit the deceased tenant’s share of the property, bypassing the probate process. This offers advantages by avoiding probate delays and taxes, granting the surviving tenant immediate access to the property. However, it is important to consider specific US state laws based on the location of the property.

These US estate complications mean that joint ownership of US real estate is generally not a recommended form of ownership if an individual will likely have a US estate tax liability. In addition, joint tenancy may not allow the spouse to undertake effective will and estate planning for US estate tax.

An alternative to joint tenancy may be to hold the property as tenants in common. This could allow each spouse to undertake will planning to protect their 50% interest. From a probate perspective, unlike joint tenancy, tenants in common do not have survivorship rights. Thus, on the death of one tenant, their interest is not automatically transferred to the other co-tenant. Instead, it can be transferred through a will or intestacy, making the deceased tenant's interest subject to probate.

Canadian discretionary trust

If the US estate tax exposure cannot be dealt with through personal ownership and will planning, an individual could consider establishing a Canadian discretionary family trust to own the US real estate property. Two key advantages are that:

• US estate tax may be avoided on the death of both the individual and the individual’s spouse
• if the property is sold, any increase in its value will be subject to the same capital gains tax rates as if the property were owned personally

This structure generally appeals to Canadians for more significant property purchases, when it does not constitute a significant portion of the individual’s net worth. This is because the individual must be willing to give up control over the trust property to his or her spouse and children. In addition, due to Canadian income tax rules, the trust will likely have to be dissolved before its 21^st anniversary date. Therefore, the trust structure may not appeal to younger families. It is important to note that, due to recent legislative changes, if the trust is created to hold the property it will be subject to tax return filing and information reporting requirements, and there are penalties for non-compliance with these rules. Additionally, an analysis may be necessary to assess whether the new Canadian rules restricting the deductibility of interest and financing expenses apply to the trust.

Non-recourse mortgage

A non-recourse mortgage may be an alternative, particularly if the US real estate property is already owned by a Canadian resident (who is not a US citizen). A non‑recourse mortgage is collectible only against the specific property and not against any other assets of the individual.

For US estate tax purposes, the value of the property is reduced by the value of the non‑recourse mortgage. For example, if Steve obtained a non‑recourse mortgage of $1 million on the $2 million Florida property, the amounts would be netted in determining the value of US property and his taxable estate would be reduced to $1 million. As a result, in 2025, his US estate tax exposure would be reduced without marital credit and fully eliminated using marital credit.

It is unlikely that a commercial bank would be willing to lend more than 50% to 60% of the value of US real estate. Therefore, it is unlikely that the total value of the property can be eliminated for US estate tax purposes by obtaining a non-recourse mortgage through an arm’s length lender.

It may be possible to reduce the cost of financing if the mortgage can be structured to obtain an interest deduction in Canada. This means that the mortgage proceeds cannot be used to purchase the US vacation home, but must instead be used to purchase other income-producing investments.

Other options

Other available options include:

• ownership through a Canadian corporation
• ownership through a partnership that is treated as a corporation for US tax purposes
• donation of the property to a US registered charity

Using a Canadian corporation may be problematic, because the shareholder may be faced with a taxable benefit, unless fair market rent is paid.

The takeaway

We encourage you to consider your options before entering into an agreement to purchase a US vacation home. Many planning techniques cannot be used after the property is purchased, because of US gift tax consequences associated with the transfer of US real estate.