US Estate Tax on US Property Owned by Ontario Residents

If you own a home in Florida or Arizona, you may have heard that the US can tax your estate on that property when you die. It is a common worry for Ontario owners, and the answer depends on the value of your whole estate, how the property is held and what the treaty provides.

This article sets out what we can say plainly about the Canadian side, explains how it differs from US income tax, and lists the questions to bring to a cross-border adviser. It does not state US estate tax thresholds or rates, which come from US sources.

Estate tax is different from income tax

Many of the rules Ontario owners hear about US property are income tax rules. Under the Canada-U.S. Tax Convention, income from real property in the U.S. (Article VI) and gains from selling it (Article XIII) may be taxed in the U.S., and Canada gives a deduction from Canadian tax for U.S. income tax paid on U.S.-source income under Article XXIV.

Whether a US estate tax issue arises on your death is a separate question that depends on your situation, so it is worth confirming with an adviser. Whether it applies to you, what exemption the treaty may give and what filing is needed are questions answered by US law and the treaty text. They should be confirmed with a US tax adviser who works with Canadians.

Facts that shape the answer

There is no single answer for every Ontario owner. A cross-border adviser will usually want to know the following.

• The value of the US property and of your worldwide assets.
• Whether you own it alone, jointly with a spouse, or with others.
• Whether it is held personally or through a corporation or trust.
• Whether there is a mortgage or other debt on the property.
• Your citizenship and residency, and your spouse's.
• What your will says, and whether it covers property in the US.

Joint ownership is worth noting on the Canadian side too, because each co-owner reports their share of rental income or loss according to their ownership share. Ownership structure can have tax effects in both countries, so review it before a purchase if you can.

The Canadian side when an owner dies

Canadian rules continue to matter. An executor or other legal representative of a deceased person uses Form T1255, rather than T2091(IND), to designate a property as a principal residence. For 1982 and later years, a family can designate only one home as its principal residence for each year, which is the key limit when a family owns both a city home and a cottage. That includes the situation of a family with an Ontario home and a US vacation home.

A spouse or common-law partner is not part of your family unit for that one-home limit if, throughout the year, they lived apart from you and were separated under a judicial separation or a written separation agreement.

If the property is used only as a vacation home, it is personal-use property and is not reported on Form T1135. If it is rented for eight months with a reasonable expectation of profit, it is specified foreign property that must be reported, once cost passes $100,000. Rental use can therefore change both your annual filings and the picture your executor inherits.

Pulling the two countries together

Because the US and Canada may both look at the same property, planning is mostly about coordination. Questions to raise with advisers include how a foreign tax credit might apply, which US tax documents the CRA may ask for where U.S. tax was paid, such as a W-2 slip, a U.S. 1040 return and a U.S. tax account transcript, and whether your Ontario will and any US-side documents work together.

Late or missing foreign reporting can be expensive. A knowing or grossly negligent failure to file T1135 is $500 per month for up to 24 months, to a maximum of $12,000, and the CRA's reassessment period can be extended by three years where income from specified foreign property was not reported and the form was missing, late or inaccurate.

What to do next

• List the US property, how it is titled, its cost and current value, and any mortgage.
• List your other assets in Canada and elsewhere, since overall estate value may matter.
• Note whether you rent the property and for how long each year.
• Locate your Ontario will and any US-side documents.
• Book a review with a US tax adviser and a Canadian lawyer or accountant so that both countries are covered.

Doing this review while you are healthy and well is generally easier than leaving it to your executor.

Frequently asked questions