US Vacation Property Owned by Canadians: Cross-Border Estate Tax Exposure at Death 2026

The Problem Most Canadians Don't Know They Have

You bought a USD $500,000 condo in Phoenix ten years ago. You spend three months there every winter. Your Canadian accountant files your T1 every spring. Your US broker handles the property management when you are back in Ontario. Nobody has ever mentioned US estate tax — because neither professional typically raises it until someone dies.

Here is what they should have told you: the United States imposes estate tax on non-resident aliens — including Canadian citizens and permanent residents — who own US-situs assets at the time of death. US real estate is a US-situs asset. The basic exemption for non-resident aliens is only USD $60,000. The top marginal rate is 40%. On a $500,000 property, the tentative US estate tax before any treaty relief is approximately USD $176,000. For a broader look at how Canadian estates are taxed at death, see our complete guide to inheritance tax in Canada.

How US Estate Tax Works for Non-Resident Aliens

US citizens and green card holders receive a unified credit that effectively exempts the first USD $13.61 million of their estate from estate tax in 2026. Non-resident aliens — which includes every Canadian who does not hold a US green card — receive no unified credit by default. Their exemption is USD $60,000.

The US estate tax is a tax on the fair market value of US-situs assets at death — not the gain, not the equity, the full value. Even if you still owe a USD $300,000 mortgage on your $500,000 condo, the estate tax is calculated on the $500,000 fair market value. The mortgage may be deductible, but only in proportion to US-situs assets relative to the worldwide estate — a complex calculation that rarely provides full relief.

Worked Example: USD $500,000 Phoenix Condo

Let's walk through the US estate tax calculation on a USD $500,000 condo in Phoenix owned by a Canadian resident who dies in 2026. For a comparison of how Canada and the US handle estate taxation differently, see our Canada vs. US inheritance tax comparison.

Step 1: Tentative US Estate Tax (Before Treaty Relief)

The graduated rate schedule produces a tentative tax of approximately USD $155,800 on a $500,000 estate. After the NRA unified credit of $13,000 (which shelters the first $60,000), the net estate tax payable is roughly USD $142,800 to $176,000 depending on how the estate is structured and whether any deductions apply. The range reflects whether the executor can claim deductions for debts, funeral expenses, and administrative costs — deductions that are available in proportion to US-situs assets relative to worldwide assets.

Step 2: Treaty Relief — The Prorated Unified Credit

The Canada–US Tax Treaty (Article XXIX-B) overrides the default $60,000 exemption. It entitles a Canadian resident who dies with US-situs assets to a prorated share of the full US unified credit — the same credit worth USD $5,389,800 that shelters $13.61 million for US citizens in 2026.

The counterintuitive result: wealthier Canadians may actually owe more US estate tax than middle-class snowbirds, because their US property represents a smaller fraction of their worldwide estate, producing a smaller prorated credit. A Canadian with a $20M worldwide estate and a $500K US condo gets a prorated credit that may not fully cover the tax. A Canadian with a $1.5M worldwide estate and the same condo gets a prorated credit that easily wipes out the tax.

Four Common Ownership Structures and Their US Estate Tax Treatment

How the property is titled determines whether it is included in the Canadian owner's US taxable estate. Each structure has trade-offs. For related cross-border estate planning strategies, see our cross-border estate planning guide.

The Double-Tax Problem: Canadian Deemed Disposition Meets US Estate Tax

When a Canadian dies owning US real estate, two countries want their tax — and they calculate it differently.

• Canada: Triggers a deemed disposition at fair market value. The capital gain (FMV at death minus adjusted cost base) is included on the deceased's final T1 return at the applicable inclusion rate. For a property bought at CAD $400,000 and worth CAD $685,000 at death, the gain is CAD $285,000. For more on how deemed dispositions work at death, see our guide to deemed dispositions on death in Ontario.
• United States: Imposes estate tax on the full fair market value of US-situs assets — not the gain, the full value. The $500,000 USD property is taxed on its $500,000 value, not the $200,000 appreciation.

Which Country Gets Paid First?

In practice, the US estate tax is typically paid first because Form 706-NA is due within 9 months of death and the IRS can place a lien on the US property. The Canadian final T1 return is due by the later of 6 months after death or April 30 of the following year. The Canada–US tax treaty (Article XXIV) provides a foreign tax credit mechanism: the US estate tax paid can generate a credit against Canadian tax owing on the same property. However, the credit is limited — it cannot exceed the Canadian tax attributable to the US-source income. The two countries tax different amounts (the US taxes FMV, Canada taxes the gain) at different rates, so the credit rarely provides a perfect offset.

Annual Reporting Obligations: FBAR and T1135

Owning US property creates annual filing obligations that survive the original owner's death. When the surviving spouse inherits the property, they inherit these obligations — and many survivors are unaware.

US Filing: FBAR (FinCEN Form 114)

Any Canadian who has US financial accounts with an aggregate value exceeding USD $10,000 at any point during the year must file an FBAR annually by April 15. This applies to US bank accounts, brokerage accounts, and certain insurance policies — but not to the real estate itself. However, most US property owners maintain a US bank account for property expenses, triggering the FBAR requirement. Penalties for willful failure to file can reach USD $100,000 or 50% of the account balance, whichever is greater.

Canadian Filing: T1135 (Foreign Income Verification Statement)

Any Canadian resident who holds specified foreign property with a total cost exceeding CAD $100,000 must file Form T1135 with their annual T1 return. US real estate is specified foreign property. A CAD $400,000 condo clearly exceeds the threshold. The T1135 reports the cost, FMV at year-end, and any income earned from the property.

What the Surviving Spouse Must File Going Forward

What You Should Do Now — Before Either Spouse Dies

The time to address cross-border estate tax exposure is while both spouses are alive, healthy, and have time to restructure ownership if necessary. Here are the steps, in order of priority:

1. Get a cross-border estate tax estimate. A cross-border tax advisor can calculate the tentative US estate tax and treaty credit based on your worldwide estate. If the treaty credit eliminates the tax, your only action item is ensuring the executor knows to file Form 706-NA. If it does not, ownership restructuring is worth evaluating.
2. Review your property title. Joint tenancy with right of survivorship creates a presumption that 100% is in the first estate. Tenants-in-common with documented contributions limits inclusion to the deceased's actual share. Retitling is straightforward and inexpensive.
3. Evaluate whether a cross-border trust is cost-justified. For a single $500,000 condo, the $10,000–$25,000 setup cost and $3,000–$5,000 annual compliance cost are rarely justified. For US holdings above $2M, a properly structured irrevocable trust becomes more economically viable.
4. Ensure both spouses know the filing obligations. Document which forms are filed annually, by whom, and with which advisor. The surviving spouse should not learn about T1135 and FBAR for the first time from a CRA penalty notice. For a broader view of estate planning steps to take now, see our estate planning checklist for Ontario.
5. Update your Canadian will with a US property clause — or draft a separate US will. Many US states require a separate will for real property located in that state. Probate in Arizona, Florida, or California without a US will is slow, expensive, and avoidable.