Tax Insights: 2025 Estate tax update ─ US estate tax exposure for US citizens living in Canada

Issue 2025-44

In brief

If you are a US citizen living in Canada, you may be subject to both the Canadian and US tax regimes at your death.

All amounts in this Tax Insights are stated in US dollars, unless otherwise noted.

In detail

As a Canadian resident, you are subject to Canadian income tax at death. As a US citizen, you are subject to US estate tax on the fair market value of your worldwide estate at the time of your death. Your worldwide estate includes all property owned at death – regardless of where the property is located – including:

• life insurance proceeds, if you own the policy or if the proceeds are payable to your estate
• registered plans (e.g. registered pension plans, registered retirement savings plans and registered retirement income funds)
• certain trust interests
• stock options

Are you a US citizen?

US citizenship status is not always clear. For example, while an individual will be granted US citizenship by virtue of being born in the United States, an individual may also be a US citizen if they are born outside of the United States to a parent who is a US citizen.

US estate tax rates and lifetime exemption

US estate tax rates start at 18% and climb to 40% when the value of your estate reaches $1 million. As a US citizen, you are entitled to a lifetime estate tax exemption. The estate tax exemption for 2025 is $13.99 million.¹ This means that, as long as no portion of the exemption was used to shelter lifetime gifts, no estate tax is payable if the value of your worldwide estate does not exceed $13.99 million.

Effective January 1, 2026, under the One Big Beautiful Bill Act, the exemption permanently increases to $15 million, to be adjusted annually for inflation.

Foreign tax credits

On death, for Canadian income tax purposes, you will be deemed to dispose of your capital property for an amount equal to its fair market value on the date of death. As a result, you may pay capital gains tax in Canada. In addition, as a US citizen, you will be subject to US estate tax on the fair market value of those assets.

The Canada-US tax treaty (the treaty) provides some relief against double taxation in the form of foreign tax credits. Under the treaty, Canada allows a federal tax credit for US estate tax payable on your property that is located in the United States. The United States allows a credit for Canadian taxes payable at death on the deemed disposition of your property that is located outside of the United States, as illustrated by the following example:

Ultimately, your estate generally pays the higher of the two countries’ taxes. Because Canadian capital gains tax rates are lower than US estate tax rates, your estate will likely pay tax at the US estate tax rate. There is an element of double taxation, because the Canadian foreign tax credit available for the US estate tax liability is provided only at the Canadian federal level (it is not available at the provincial/territorial level).

Marital deduction and marital credit

As a Canadian resident, you can transfer your assets to your Canadian-resident spouse on a rollover basis at the time of your death. This allows you to defer the payment of any Canadian income tax until the death of your spouse.

For US estate tax purposes, US estate tax is deferred only if your assets pass to a US-citizen spouse (referred to as the marital deduction). If your spouse is not a US citizen, the marital deduction is not available unless the bequest is made to a special form of trust, known as a Qualified Domestic Trust (QDOT).

Alternatively, the treaty provides a marital credit against estate tax if certain conditions are met, allowing a US citizen to effectively double the amount that can pass to a Canadian spouse free of US estate tax. For example, Jane is a US citizen married to John, a non-US citizen. Jane dies in 2025, and during her lifetime Jane has not used her US estate and gift tax exemption, thus the entire exemption amount of $13.99 million is available. Jane could bequest double that amount ($27.98 million) of assets to John, before her estate would be subject to US estate tax.

Unused lifetime exemption

Any portion of the deceased’s remaining $13.99 million (2025) lifetime exemption may be used by the surviving spouse’s estate. To take advantage of this exemption “portability:”

• the surviving spouse must also be a US citizen or domiciled in the US, and
• the executor for the estate of the first spouse to die must file an election to transfer the unused exemption to the surviving spouse

The election must be filed on time (by the estate tax return filing deadline, see below), even if the estate is not required to file an estate tax return.

Filing an estate tax return

In general, even if no estate tax is due, a US estate tax return must be filed:

• if the value of your worldwide estate exceeds the exemption amount for the year, or
• to elect the transfer of any unused portion of the exemption to the surviving spouse

The filing deadline for the return is generally nine months after the date of death. However, a 6-month extension of time to file an estate tax return is available. In addition to the US estate tax return, further reporting disclosures may be applicable to report the assets transferred from the deceased estate to the beneficiaries. Regulations have recently been issued requiring that the basis of certain property acquired from a decedent by a recipient be consistent with the value determined for federal estate tax purposes.

US gift tax

You cannot avoid US estate tax by giving away your assets during your lifetime, because the US imposes a gift tax on lifetime transfers. The gift tax is unified with estate tax, so that the gift tax is imposed at the same rate as the estate tax and provides the same $13.99 million (2025) exemption. Gifts made within three years of death are fully included in the estate of the deceased individual and subject to US estate tax. This rule is designed to limit the making of deathbed gifts to reduce the estate tax basis.

However, as discussed, if you use the exemption for gift tax, your estate tax exemption will decrease by a corresponding amount. Gift tax applies to gifts of all types of property, regardless of where the property is located.

Gifts to your US-citizen spouse are not subject to gift tax. However, if your spouse is not a US citizen, you will be subject to gift tax if your annual gift to your spouse in 2025 is more than $190,000 (indexed annually). Also, for Canadian tax purposes, the attribution rules must be considered when property is gifted to a spouse.

In addition, you are entitled to an annual exclusion of $19,000 (indexed annually) for gifts made to anyone other than your spouse. For example, if you have four children, you can give up to $76,000 to your children in 2025 and not be subject to US gift tax. You will not be required to file a gift tax return and the $76,000 will not reduce your lifetime gift and estate tax exemption amount.

Should the value of a gift to your non-US-citizen spouse exceed the annual exclusion of $190,000, or if the value of a gift made to anyone other than your spouse exceeds $19,000, the donor will be required to file form 709 (United States Gift (and Generation-Skipping Transfer) Tax Return) to report the value of the gift to the Internal Revenue Service (IRS). Generally, the due date for the gift tax return is no later than April 15^th of the year after the gift was made, but an extension of time to file is available.

If you and your spouse are both US citizens, you can double your annual gift limit by consenting to split your gifts. You and your spouse may both be required to file a US gift tax return. Under the new IRS process, a Notice of Consent must be signed by the consenting spouse and attached to the gift tax return of the donor spouse. The application of the US gift tax rules is further summarized in the following table.

US generation-skipping transfer (GST) tax

The GST tax applies for certain transfers to a “skip person” (an individual more than one generation younger than the transferor, such as a grandchild). The GST tax rate is 40% and a lifetime $13.99 million exemption (2025) is available.

The GST tax is applied to “skip transfers” in addition to any applicable gift tax. This effectively prevents individuals from transferring property to a skip person to avoid a generation of estate tax.

The GST tax also may apply if assets are left to a family trust that includes a skip person. For example, it is common in Canada to leave assets in trust for children and grandchildren. In this case, the deceased may have to allocate his or her $13.99 million GST tax exemption to the trust to prevent the application of GST tax, because the assets could pass to a grandchild at some future date.

The takeaway

US citizens living in Canada should consider their US tax exposure and be mindful of the US estate and gift tax consequences of asset transfers during their lifetime. Will and estate planning should take into account the US tax reporting requirements and potential US tax liability on death.