Settling a Canadian Estate With US Assets

Which US assets can trigger an estate tax return?

US real estate and shares of a corporation organized under US law generally count as US-situated assets of a Canadian decedent who was neither a US citizen nor domiciled in the US. The location of a share certificate or brokerage account does not change where the shares are situated. A US bank deposit is generally outside the US estate tax base if it was not connected with a US trade or business. Debt, funds, insurance, jointly owned property, and property held through an entity need their own classification (IRS: Form 706-NA instructions).

For jointly owned US property, do not assume the decedent's title percentage is the estate-tax value. Joint tenancy with a right of survivorship can put the full value in the gross estate unless a contribution or other exception applies; check ownership and funding records (IRS: Form 706-NA instructions). If the estate owns Canadian private-company shares, see When a corporation owner dies for the Canadian tax on those shares.

US estate tax domicile is a separate test from income tax residence: it turns on living in a place with no definite present intention to leave. A Canadian mailing address or a short US stay alone cannot settle domicile (IRS: Form 706-NA instructions).

Must the executor file Form 706-NA if the treaty removes the tax?

Yes, if the date-of-death value of US-situated assets plus adjusted taxable gifts and the gift tax specific exemption exceeds US$60,000. That is a filing test, not a tax bill. The treaty credit is calculated on the return; it does not replace the filing test (IRS: Form 706-NA instructions).

For a Canadian resident who was not a US citizen, the treaty's small-estate rule can exclude some US securities from estate tax when the worldwide gross estate is no more than $1,200,000. US real estate can remain taxable under that rule. When filing Form 706-NA, list exempt assets and values in an attached treaty statement, not Part V; include them in the worldwide gross estate on Part IV (IRS: Form 706-NA instructions). Do not assume an exemption from tax excuses a required return.

How does the executor get US shares or property released?

An IRS transfer certificate tells a holder of US assets that the IRS is satisfied any estate tax has been paid or provided for. Ask the custodian or title holder which release papers it requires. The IRS says a certificate is not required for property administered by an executor appointed, qualified, and acting in the US; a US address alone does not establish that status (IRS: transfer certificate requirements).

The IRS explicitly says not to file an unnecessary Form 706-NA under Part B because it delays the certificate. It may instead issue a letter saying no certificate is required. The IRS says Part B processing takes 12 to 18 months after it receives all required documents. Give the IRS certificate or letter to the holder, then complete its transfer or title paperwork; confirm what the holder accepts before relying on the no-certificate route (IRS: transfer certificate requirements).

For a sale of US real estate administered by an executor appointed, qualified and acting in the US, a transfer certificate is unnecessary, but a required Form 706-NA can create an estate-tax lien that must be discharged for the buyer. Apply on Form 4422 before closing (IRS: selling estate real property).

How does the Canada–US treaty credit use the whole estate?

The treaty generally gives the Canadian resident's estate the greater of the ordinary nonresident estate credit and a share of the US citizen's credit. That share is US-situated gross estate divided by worldwide gross estate. The worldwide value is needed even though the US estate tax return taxes US property, and the IRS needs enough information to verify the calculation (treaty, Article XXIX B(2)).

The US citizen's basic exclusion for deaths in the page's tax year is US$15,000,000 (IRS: inflation adjustments). A Canadian estate does not simply receive that full exclusion: the treaty prorates the *credit* and accounts for certain prior gifts. If qualifying property passes to a surviving spouse, the executor may elect the Canadian marital credit on Form 706-NA, Part II, line 10, attach its calculation, and irrevocably waive any US marital deduction by the QDOT-election deadline. That election generally must be made on a return filed no later than one year after the return due date, including granted extensions (treaty, Article XXIX B(3); IRS: Form 706-NA instructions; IRS: Form 706 instructions). The calculation needs the actual asset values, gifts, deductions and treaty position.

If asset values fall after death and US estate tax remains payable, the executor can elect alternate valuation on Form 706-NA, Part V, line 1, when filing the return. The election applies to all property and requires both a lower gross estate and lower net estate tax. Property sold or distributed within six months uses its disposition-date value; other property uses the six-month value (IRS: Form 706-NA instructions).

Can US estate tax reduce the Canadian final-return tax?

Sometimes. Article XXIX B(6) permits a limited deduction from Canadian tax for US federal or state estate or inheritance tax payable on US-situated property. For tax imposed at death, it applies against Canadian tax on US-source income, profits or gains in the year of death. If the worldwide gross estate exceeds $1,200,000, it can also reach that year's income, profits or gains from property situated in the US at death. The treaty coordinates this with any credit for US income tax (treaty, Article XXIX B(6)).

This is a limit tied to particular income and property, not a general offset against all tax on the Canadian final T1. For what belongs on the final T1 or estate T3, see Taxes when someone dies in Canada.

Canadian tax on a death gain can change independently: qualifying property passing to a Canadian-resident spouse or spouse trust may roll over under Income Tax Act subsection 70(6) if it vests within 36 months; the executor may elect out on the final T1. If the graduated rate estate later realizes eligible capital or terminal losses in its first three tax years, the legal representative may elect under subsection 164(6) to carry them to the final T1. Send the election letter and Form T1-ADJ by the later of the final T1 deadline and the T3 deadline for the loss year (CRA: death capital gains; Income Tax Act, section 164; CRA: T3 Trust Guide).

For example, if death creates a taxable Canadian gain on a directly owned US condo, US estate tax payable on that property may reduce Canadian tax on that gain, within the treaty limits (treaty, Article XXIX B(6)).

Does the deceased person or the estate need a US income tax return?

The deceased person and the estate are separate US income tax filers. If the person would have had to file Form 1040-NR for US income before death, the executor files that final return. A foreign estate that must file for income after death generally uses Form 1040-NR; check the income type and withholding, since fully withheld passive income may not require a return. Form 706-NA does not report either period's income (IRS: Publication 559; IRS: Form 1040-NR instructions).

The estate's US classification must be checked separately. The IRS Form 1041 instructions direct a fiduciary of a foreign estate to Form 1040-NR rather than Form 1041. Annual reporting of ongoing rent belongs in Canadians with US rental property.

What withholding applies if the estate sells the US condo?

If a foreign estate sells US real estate, the buyer generally withholds 15% of the amount realized under FIRPTA. For a cash sale, that is generally the gross sale price, including debt the buyer assumes, rather than the estate's gain or cash after paying its mortgage. Withholding is not the final tax on the gain. A buyer's qualifying use as a residence can eliminate withholding if the amount realized is no more than US$300,000, or reduce the rate to 10% if it is above that amount but no more than US$1,000,000 (IRS: FIRPTA withholding; IRS: rate rule; IRS: exceptions).

For the no-withholding residence exception, the buyer must be an individual, and the buyer or family must plan to live there for at least 50% of the days anyone uses it in each of the first two 12-month periods after closing; vacant days do not count (IRS: Form 8288 instructions).

The buyer's planned use, the full amount realized, the seller's US tax status, and any IRS withholding certificate matter before closing. See Selling US real estate as a Canadian for the sale return and recovery of excess withholding.

Does a US-resident executor make the Canadian estate US-resident?

An executor's US address alone does not decide the Canadian estate's tax residence. The CRA looks at where the estate's real decisions and central management and control actually occur. An executor usually exercises that control, but beneficiaries or other decision makers may do so in fact (CRA: residence of a trust or estate).

Keep records of who directs investments, approves distributions, appoints advisers, and makes decisions, and where those decisions occur. An executor who makes the main decisions from the US may change the Canadian residence analysis. Check the estate's US income-tax classification separately before choosing Form 1040-NR or Form 1041; the US address alone does not settle it (CRA: residence of a trust or estate; IRS: Form 1041 instructions).

If the estate is resident in both countries under domestic rules, Article IV(4) of the treaty sends its treaty residence and treaty treatment to the competent authorities for mutual agreement; an executor's address is no treaty tie-breaker (Canada–US treaty, Article IV).

Which US and Canadian deadlines must the executor track?

Form 706-NA is due nine months after death. File Form 4768 by that original due date for an automatic six-month filing extension; more time to file does not itself give more time to pay. The Canadian final T1 and estate T3 have their own clocks (IRS: Form 706-NA instructions; IRS: Form 4768 instructions; CRA: deadlines after death).

An executor outside the US who already has that extension may request more filing time on a second Form 4768, with an explanation (IRS: Form 706-NA instructions).

If the deceased or a spouse living with them operated a business at death, the final T1 filing deadline is June 15 after the death year for deaths through December 15, or six months after death for later deaths; the payment deadline does not move with this filing extension. The estate's first tax year-end and whether a T3 is required also need review (CRA: deadlines after death).

A required final Form 1040-NR is due the 15th day of the sixth month after its tax year-end, or the fourth month if the deceased received wages subject to US withholding. A foreign estate's Form 1040-NR is due the 15th day of the sixth month after its tax year-end, or the fourth month if it has a US office; a domestic estate's Form 1041 is due the 15th day of the fourth month (IRS: Form 1040-NR instructions; IRS: Form 1041 instructions). Also check the state where US real estate sits for a separate estate-tax return and lien release; federal filings do not settle state requirements (New York State: estate tax).

A required Form 706-NA does not always require Form 8971. Check its exceptions first, especially whether the gross estate plus adjusted taxable gifts and specific exemption is below the basic exclusion for the year of death. If required, file Form 8971 and furnish beneficiary Schedules A by the earlier of 30 days after filing Form 706-NA or 30 days after its due date, including extensions (IRS: Form 8971 instructions).

Before distributing, the legal representative should obtain CRA clearance on Form TX19 after the required returns are assessed and tax is paid or secured; if the deceased had a GST/HST account, also use Form GST352. Without clearance, Income Tax Act subsection 159(3) makes the representative personally liable for unpaid tax up to the value distributed, and the CRA may assess that liability at any time (Income Tax Act, section 159; CRA: clearance certificate). A Quebec succession also files its own final TP-1 and any required TP-646, and its liquidator must request a separate Revenu Québec distribution certificate on Form MR-14.A before paying the deceased's debts or distributing property or post-death income. Quebec allows urgent expenses up to C$12,000 before that certificate. Under Quebec's Tax Administration Act, an unauthorized distributor is personally liable up to the value distributed; Revenu Québec generally has four years from distribution to assess that liability (Revenu Québec: returns and deadlines; Revenu Québec: distribution certificate; Revenu Québec: trust return guide).

US tax can also follow the assets. A federal estate-tax lien generally lasts ten years from death, and Internal Revenue Code section 6324(a)(2) makes recipients of specified gross-estate property personally liable for unpaid estate tax up to that property's date-of-death value. If an insolvent estate pays others despite a known or reasonably discoverable federal tax claim, its representative can be personally liable up to those payments under 31 USC 3713(b). Section 6901 generally allows assessment of an initial transferee until one year after the estate's assessment period ends; for a fiduciary, the deadline is the later of one year after liability arises or the tax collection period ends (US Code: estate-tax lien and recipient liability; US Code: federal claims; US Code: assessment periods; IRS: Publication 559).

What should the executor gather first?

Start with proof of authority and values for both the US property and the whole estate. The IRS asks for a death certificate, will or other proof of appointment, valuations, and support for treaty claims; its transfer certificate route adds a sworn statement if no Form 706-NA is required (IRS: Form 706-NA instructions; IRS: transfer certificate requirements).

• Death certificate, will, codicils, probate or appointment papers, and English translations where needed.
• Date-of-death statements for US shares, bank accounts, and other assets; deeds, title, mortgage records, and a property valuation for US real estate.
• Worldwide date-of-death asset and debt values, joint-ownership documents, and records of prior US taxable gifts. For Form 706-NA, Part IV, line 2, obtain a certified foreign death-tax return or, if none was filed, a certified estate inventory and debt schedule from probate or administration records (IRS: Form 706-NA instructions).
• The deceased person's US and Canadian returns, US rent and withholding records, and any planned sale documents.
• The custodian's or title holder's written release requirements, plus records showing who manages the estate and from where.

If the estate has US tax filings or US payers, apply for an estate EIN and give it to payers reporting post-death income. File Form 56 to notify the IRS of your fiduciary role when the required information is available; use the estate's EIN for its returns (IRS: Publication 559).

Example

Illustrative values are in US dollars. A Canadian resident dies owning $200,000 of US corporate shares and a $500,000 US condo. Their worldwide gross estate is $7 million, including those US assets, and assume no prior taxable gifts. The US assets total $700,000, so Form 706-NA meets the filing test even if treaty credits eventually remove the tax. The treaty fraction for the prorated credit is $700,000 ÷ $7 million, or 10%. The executor needs worldwide valuations to support that fraction, then asks the holder whether it needs an IRS transfer certificate. Any US rent before and after death is reviewed on separate income tax returns.

Different for you?

• The deceased was a US citizen, US domiciliary, or former US citizen: the estate tax route can change. Get cross-border tax help.
• You need the Canadian final T1, estate T3, or CRA clearance certificate: see Taxes when someone dies in Canada.
• You inherited from a Canadian parent and live in the US: see Gifts and inheritances from abroad for your own reporting.
• You inherited a US retirement account and live in Canada: see US retirement accounts in Canada.
• You are planning how to hold US property before death: see How a Canadian should own US property.
• The estate is selling US real estate or collecting rent: see Selling US real estate as a Canadian or Canadians with US rental property.
• A treaty election, large estate, US-resident decision maker, or frozen account needs coordinated filings: get cross-border tax help with the documents above.