For many dual US-Canada citizens, a comfortable retirement in British Columbia or Ontario often comes with a hidden, ticking time bomb: the United States federal estate tax. There is a common and dangerous misconception among expats that because their primary residence and liquid assets are located in Canada, they are shielded from the reach of the Internal Revenue Service (IRS). In reality, the IRS asserts taxing jurisdiction over your entire global estate, regardless of where those assets sit or where you reside. As we approach the looming expiration of the Tax Cuts and Jobs Act (TCJA) on December 31, 2025, the threshold for this tax is set to plummet. According to the IRS, the current 2024 basic exclusion amount is a generous $13.61 million, but come 2026, that figure is expected to be cut nearly in half to approximately $7.26 million. For a dual-citizen couple with a home in Vancouver's high-priced market and a diversified portfolio, this "cliff" represents a potential multi-million dollar liability that requires immediate, proactive intervention.
Key Takeaways
- The 2026 TCJA sunset will reduce the individual estate tax exemption from $13.61M to an estimated $7.26M.
- Dual citizens are taxed on worldwide assets, including Canadian real estate, RRSPs, and private company shares.
- The US-Canada Tax Treaty offers unique relief (Article XXIX B) but requires sophisticated filing to avoid double taxation.
- High-net-worth individuals have a "use it or lose it" window to gift assets before the exemption drops.
- Failure to report foreign assets on Form 8938 and FinCEN Form 114 can trigger penalties starting at $10,000.
The 2026 Sunset: Why Your $10M Portfolio Just Became a Liability
The current estate tax landscape is a historical anomaly. When the Tax Cuts and Jobs Act of 2017 was passed, it doubled the base estate and gift tax exemption. According to IRS Revenue Procedure 2023-34, the 2024 exemption stands at $13.61 million per individual (or $27.22 million for a married couple). This high ceiling has allowed many cross-border families to ignore estate tax planning for nearly a decade. However, under the original legislation, these provisions are scheduled to "sunset" at the end of 2025. Unless Congress acts—which is far from guaranteed—the exemption will revert to pre-2018 levels, adjusted for inflation.
Per Treasury Department projections, we are looking at an exclusion of roughly $7 million to $7.5 million. For dual citizens, this is particularly precarious. Consider a couple living in Toronto with a primary residence worth $4 million CAD, an investment portfolio of $5 million CAD, and shares in a family business. Under today’s rules, they are safely under the $27.22 million threshold. On January 1, 2026, they could suddenly find their estate exposed to a 40% federal tax on everything above the new, lower limit.
Source: IRS.gov (Rev. Proc. 2023-34)
| Tax Year |
Individual Exemption |
Top Tax Rate |
| 2024 |
$13.61 Million |
40% |
| 2025 (Est.) |
$13.9 - $14.1 Million |
40% |
| 2026 (Forecast) |
~$7.26 Million |
40% |
The "Double Whammy": US Estate Tax vs. Canadian Deemed Disposition
The complexity of cross-border wealth stems from the fundamental difference between the two tax systems. Canada does not have an "estate tax" or "inheritance tax." Instead, the Canada Revenue Agency (CRA) treats death as a "deemed disposition." Per the Income Tax Act (Canada), you are treated as having sold all your assets at fair market value immediately before death, triggering capital gains taxes on any appreciation.
The United States, conversely, imposes a tax on the total value of the assets themselves. This creates a potential for double taxation: the CRA taxes the gain, and the IRS taxes the principal value. We often see clients struggle because the Canadian tax is a debt of the estate that reduces the value of the US estate, but it does not always provide a dollar-for-dollar credit against the US estate tax unless specific treaty elections are made.
According to Article XXIX B of the US-Canada Income Tax Treaty, dual citizens can claim a credit for Canadian taxes paid on the deemed disposition against the US estate tax liability. However, this is not automatic. It requires filing Form 706 (United States Estate Tax Return) and precisely calculating the "Pro-Rata Unified Credit." Without expert navigation of our cross-border services, families often miss out on these credits, leading to effective tax rates that can exceed 50% of the total estate value.
Source: Canada.ca (US-Canada Tax Treaty)
Step 1: Aggressive Gifting and the "Use It or Lose It" Rule
The most effective way to mitigate the 2026 cliff is to remove assets from your taxable estate today. The IRS has confirmed in Treasury Regulation § 20.2010-1 (the "anti-clawback" regulations) that individuals who make large gifts between 2018 and 2025 will not be penalized when the exemption drops in 2026. This means if you gift $10 million today, and the exemption drops to $7 million in 2026, the IRS will not "claw back" the $3 million difference into your estate.
We recommend our high-net-worth clients utilize the Annual Exclusion, which for 2024 is $18,000 per recipient. A married couple can give $36,000 to each child or grandchild every year without touching their lifetime exemption. For larger transfers, you must file Form 709 (United States Gift Tax Return). For dual citizens, gifting Canadian real estate or shares in a Canadian-Controlled Private Corporation (CCPC) requires careful coordination to ensure you aren't triggering an immediate capital gains hit in Canada while trying to solve a future US tax problem.
PRO TIP: The SLAT Strategy
For dual-citizen couples, consider a Spousal Lifetime Access Trust (SLAT). By gifting assets into an irrevocable trust for your spouse, you utilize your $13.61M exemption before it expires, but your household retains indirect access to the income. Ensure the trust is drafted as a "Grantor Trust" for US purposes but watch for Canadian "Taxation of Trusts" rules to avoid unintended 21-year deemed disposition issues in Canada.
Step 2: Restructuring Canadian Assets and CCPCs
If you own a Canadian corporation, your estate planning is significantly more complex. Many dual citizens use CCPCs to defer Canadian tax on active business income. However, the IRS views these through the lens of Controlled Foreign Corporation (CFC) rules. Upon the death of a shareholder, the transition of these shares can trigger "Subpart F" income or Global Intangible Low-Taxed Income (GILTI) issues for the heirs if they are also US citizens.
To protect these assets, we often look at "Estate Freezes" in Canada. This allows you to lock in the current value of your company shares for Canadian tax purposes and pass future growth to the next generation. From a US perspective, we must ensure this doesn't run afoul of IRC Section 2701, which governs valuation freezes. According to the IRS Statistics of Income (SOI) data, valuation disputes are one of the leading causes of prolonged estate audits. Securing a qualified cross-border appraisal for your Canadian business is an essential step before 2026.
Source: IRS.gov (SOI Estate Tax Stats)
Step 3: Compliance Cleanup – FBAR, FATCA, and Form 3520
You cannot plan for an estate tax cliff if your current compliance is in disarray. The IRS and FinCEN have significantly increased their data-sharing capabilities with the CRA. Under the Foreign Account Tax Compliance Act (FATCA), Canadian banks are required to report accounts held by US citizens to the IRS. If your estate includes "foreign" (Canadian) trusts or large bank accounts that haven't been reported, the penalties can be devastating.
FinCEN data indicates that the failure to file the Report of Foreign Bank and Financial Accounts (FBAR/FinCEN Form 114) for accounts exceeding $10,000 can result in non-willful penalties of over $16,000 per violation (adjusted for inflation). Furthermore, if you are a beneficiary of a Canadian trust or have an interest in a TFSA (which the US views as a foreign trust), you must file Form 3520 and 3520-A. Ensuring these forms are current is a prerequisite for any sophisticated 2026 tax planning strategy we implement.
Common Mistakes to Avoid
- Ignoring the "Situs" of Assets: Thinking only US-situs assets (like Florida condos) are taxed. For US citizens, the "situs" is the world.
- Relying on a Canadian Will Alone: Canadian wills often lack the specific language needed to qualify for the US Marital Deduction, especially if the surviving spouse is not a US citizen.
- Overlooking State Estate Taxes: While the federal exemption is high, states like New York, Washington, or Oregon have much lower exemptions (some as low as $1 million). If you maintain a US domicile or property in those states, you face an additional tax layer.
- Waiting Until 2026: Estate planning documents and asset transfers take months to execute correctly. Starting in late 2025 may be too late to secure appraisals and file necessary gift tax returns.
Frequently Asked Questions
Does Canada have an estate tax?
No. Canada taxes the unrealized capital gains on your assets at the time of death (deemed disposition). However, the US-Canada Tax Treaty allows for certain credits to prevent these two different taxes from applying to the same assets.
Will the IRS really "claw back" my gifts if the law changes?
No. Per Treasury Decision 9884, the IRS confirmed that individuals who use the increased gift and estate tax exclusion amounts will not be adversely impacted when the exclusion amount decreases in 2026.
What happens if I don't file an FBAR?
Penalties for failing to file FinCEN Form 114 can be severe. For non-willful violations, penalties start at roughly $16,000 per year. For willful violations, it can be the greater of $100,000 or 50% of the account balance.
Are RRSPs and TFSAs included in my US estate?
Yes. The fair market value of your RRSPs, RRIFs, and TFSAs are included in your gross estate for US federal estate tax purposes. While RRSPs have treaty protection for income tax, they have no such protection from the estate tax.
Don't Wait for the Sunset
Protect your cross-border legacy from the 2026 exemption drop. Our team of specialists at Zenith Financial Advisors is ready to review your global portfolio and implement a strategic plan.
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