Recent US Tax Updates Impacting Canadian Estate Planning: What You Need to Know in 2025
For Canadians with US assets or US beneficiaries, 2025 has brought significant developments in US tax law that could reshape estate planning strategies. Whether you own US real estate, hold US investments, or have family members who are US citizens or residents, these changes may affect your tax exposure and the after-tax value of your estate.
Shrinking US Estate Tax Exemption: Act Before 2026
The most pressing update is the scheduled reduction of the US federal estate and gift tax exemption. Currently, the exemption is nearly $14 million USD per individual, allowing many Canadians with US ties to avoid US estate tax entirely. However, unless new legislation is passed, this exemption will drop by half at the start of 2026, reverting to pre-2018 levels. This means that estates valued above approximately $7 million USD could face significant US estate tax exposure, with marginal rates ranging from 18% up to 40% on US-situs assets.
For Canadian residents who are not US citizens, the Canada-US tax treaty provides some relief, including a prorated unified credit, marital credit, and foreign tax credit, which can reduce or eliminate US estate tax liability for many families. However, as the exemption shrinks, more Canadians with US property or investments may find themselves subject to US estate tax for the first time.
Potential Surtax on Foreign Income: New Risks for Cross-Border Trusts and Investments
A new proposal, Section 899, is also making waves. If enacted, it would impose an additional surtax—potentially up to 20%—on income earned from the US by individuals or trusts in countries the US deems to have “unfair tax rules,” which could include Canada. Even more concerning, punitive withholding rates of up to 50% could apply in certain cases. This proposal is still under consideration, but if passed, it could significantly impact Canadians who invest in US real estate, hold US securities, or receive US-sourced income through trusts.
Implications for Canadian Estate Planning
These changes have several practical implications for Canadians with US connections:
- Review Your Estate Plan Now: With the estate tax exemption set to fall in 2026, high-net-worth Canadians should consider whether to accelerate gifts or other planning strategies to take advantage of the current, higher exemption.
- Assess US-Situs Assets: US real estate, shares in US corporations, and certain other US assets are subject to US estate tax for non-citizens. If your worldwide estate exceeds the exemption, your US assets could be taxed at rates up to 40%.
- Consider the Impact on US Beneficiaries: If your beneficiaries are US citizens or residents, they may face additional US tax reporting and compliance obligations, and your estate plan may need to be adjusted to minimize double taxation. Moreover, if your US beneficiaries inherit your estate directly – without further planning, your wealth could push their own status into one that exposes them to the high US estate tax rates.
- Monitor Legislative Developments: The proposed surtax on foreign income could dramatically increase the tax cost of holding US assets through Canadian trusts or corporations. Stay informed and reassess your structures if the law changes.
Moving Forward
The US tax landscape is shifting, and Canadians with US assets or beneficiaries must be proactive. The looming reduction in the estate tax exemption and the threat of new surtaxes on foreign income mean that cross-border estate planning is more important than ever. Reviewing your estate plan with qualified cross-border tax and legal advisors can help ensure your legacy is preserved and your family is protected from unexpected tax liabilities.
Disclaimer: I am not a tax lawyer or qualified tax professional, but we consult with and partner with tax experts and cross-border lawyers in our daily practice of estates law. We provide general tax-related information therefore, but not tax advice.