Navigating Cross-Border Wealth Planning – A Guide for Canadian Couples with a U.S. Citizen Spouse

For many Canadian families, the concept of U.S. citizenship may seem remote—until it turns out that one spouse holds a U.S. passport, was born in the U.S., or is even a dual citizen through a parent. This quiet connection to the United States can trigger a complex layer of cross-border tax, estate, and financial planning challenges that must be proactively managed to preserve family wealth, reduce tax exposure, and protect future generations.

At Cardinal Point Wealth Management, we specialize in helping cross-border families navigate these unique planning issues. In this article, we outline the core tax planning, estate planning, and financial considerations for Canadian-resident couples where one spouse is a U.S. or dual citizen.

Understanding the Hidden Reach of U.S. Tax Law

The U.S. is one of only two countries in the world that taxes its citizens on their worldwide income, regardless of where they live. This means that a U.S. citizen living in Canada remains subject to U.S. tax filing and reporting obligations, including on Canadian income and accounts.

Key Tax Filings Required for U.S. Citizens in Canada:

• U.S. Form 1040: Annual personal income tax return.
• Foreign Bank Account Report (FBAR) – formally known as FinCEN 114: Required if foreign financial accounts exceed USD $10,000 at any point in the year.
• IRS Form 8938 (FATCA): Reports specified foreign financial assets over certain thresholds that are based on tax filing status.
• Canadian T1 Return: The individual must also file and pay tax in Canada on worldwide income.

Despite the Canada–U.S. Tax Treaty, which generally provides for relief from double taxation through credits and income sourcing rules, the complexity and filing burden remain high. And importantly, failure to file U.S. forms and reports can result in severe penalties—even if no U.S. tax is due.

Cross-Border Financial Planning for Canadian Households

While both spouses may live and work in Canada, the U.S. citizen spouse has added planning requirements that affect retirement planning, investing, and even basic decisions like opening accounts or contributing to a TFSA.

Registered and Tax-Free Accounts: Proceed with Caution

• TFSA (Tax-Free Savings Account) & FHSA (First Home Savings Account): Not recognized by the IRS as tax-free. Income and gains inside a TFSA/FHSA are reportable and taxable in the U.S.
• RESP (Registered Education Savings Plan): Similarly, not recognized as tax-advantaged and may create trust reporting obligations in the U.S.
• RRSP/RRIF: These accounts are tax-deferred for U.S. purposes.

Planning Tip: Registered accounts, such as the TFSA, FHSA, and RESP, should generally be held in the name of the Canadian spouse only, where possible. This avoids triggering U.S. tax or information-reporting requirements.

Investment Considerations

Most Canadian mutual funds and ETFs are classified as PFICs (Passive Foreign Investment Companies) by the IRS, resulting in punitive tax treatment and onerous reporting. PFIC taxation can include:

• Taxation at the highest U.S. marginal rate;
• Interest charges on deferred taxes; and/or
• Annual IRS Form 8621 filings.

To avoid PFICs, U.S. citizens in Canada should:

• Consider U.S.-compliant investment accounts using Canadian platforms with cross-border investment mandates.
• Favor individual stocks, U.S.-domiciled ETFs, and other compliant vehicles.

Estate Planning Implications: U.S. Citizens Are Always in Scope

When one spouse is a U.S. citizen, even if they’ve lived in Canada for decades, the U.S. estate and gift tax system continues to apply. This includes:

• Estate tax: Applies to worldwide assets of a U.S. citizen at death, with a lifetime exemption (USD $13.99 million in 2025).
• Gift tax: Annual exclusions (USD $19,000 per donee in 2025) and reporting obligations for larger gifts. The annual exclusion increases to USD $190,000 in 2025 if made from a U.S. citizen to a non-U.S. citizen spouse.

Common Missteps:

• Asset titling between spouses: Transferring joint property or gifting between a Canadian spouse and a U.S. citizen spouse without tax advice can trigger gift tax issues or the loss of estate planning benefits.
• No U.S. Will or Trusts: Many Canadians are unaware that their estate may be subject to two different tax and legal regimes at death.

Spousal Rollover Not Available for Non-Citizens
In the U.S., an unlimited marital deduction allows assets to pass between spouses at death without triggering estate tax. However, this does not apply if the surviving spouse is not a U.S. citizen—unless a Qualified Domestic Trust (QDOT) is used.

Real Life Example: What Happens If the Canadian Spouse Dies First?
Let’s consider Sarah (a dual U.S. & Canadian citizen) and David (only a Canadian citizen), living in Toronto. David owns most of the family’s assets. If David dies first, he can leave his assets to Sarah tax-free under Canadian rules—but in the eyes of the U.S., Sarah now controls a larger worldwide estate, potentially subject to U.S. estate tax when she passes. To reduce U.S. estate tax exposure:

• Consider creating a testamentary spousal trust (or “qualified spousal trust” under Canadian law) with provisions tailored to meet the U.S. QDOT requirements.
• Use joint gifting strategies, insurance, and asset reallocation during life to balance estates.

U.S. Citizenship Transmission to Children

A key planning consideration often overlooked is that a child born to a U.S. citizen parent may inherit U.S. citizenship, even if born and raised in Canada. This creates lifetime U.S. tax filing and reporting obligations, whether or not the child ever lives in the U.S.

When Is a Child a U.S. Citizen?

• Birth in the U.S.: Automatic U.S. citizenship.
• Birth abroad to one U.S. citizen parent: If the parent meets specific physical presence requirements (generally five years in the U.S., two years of which are after age 14), the child is also a U.S. citizen.

If the child is a U.S. citizen, they:

• Must file U.S. tax returns once earning income above filing thresholds.
• Must report foreign accounts over $10,000 (FBAR/FinCEN 114).
• May face PFIC and trust filing exposure if named in a RESP, TFSA, or Canadian trust.

Planning Tip: Consider consulting with an immigration attorney before applying for a U.S. passport for a newborn. Once citizenship is recognized, it typically cannot be reversed easily.

The Exit Tax and Renunciation of U.S. Citizenship

Some U.S. citizens in Canada consider renouncing their U.S. citizenship to escape the lifelong U.S. tax and reporting burdens. However, doing so can trigger the U.S. exit tax if they are considered a “covered expatriate” by meeting any of the below criteria

• Their net worth exceeds USD $2 million.
• Their average U.S. tax liability over the past five years exceeds a threshold (USD $206,000 in 2025).
• They are not compliant with all U.S. tax filings for the previous five years.

If the exit tax applies, a deemed disposition of worldwide assets occurs, similar to a capital gains tax event, with a USD $890,000 exemption in 2025. Renunciation also requires payment of a USD $2,350 fee and an in-person consular appointment.

Insurance, Pensions, and Retirement Accounts

U.S. Taxation of Canadian Pensions

• Canadian government pensions (like the CPP & OAS) are generally only taxable in Canada, whereas employer pensions are generally taxable in both Canada and the U.S., with treaty relief.
• Lump-sum commuted values of employer pensions can have adverse U.S. tax implications.

Life Insurance

• Canadian-owned term life insurance is generally not subject to U.S. income tax or reporting during life; however, this may not be the same for Canadian Whole or permanent Universal life insurance policies
• U.S. estate inclusion of policy death benefit can occur if the U.S. citizen owns or controls the policy.

Structuring Family Wealth: Trusts, Corporations, and Real Estate

Family Trusts
Canadian discretionary trusts involving U.S. citizens (as settlors, trustees, or beneficiaries) trigger complex U.S. reporting (IRS Forms 3520/3520-A) and potential income inclusion and double taxation under grantor trust rules.

Private Corporations
A U.S. citizen who owns shares in a Canadian private corporation may face:

• Attribution rules;
• PFIC rules (if the corporation is passive);
• Reporting via IRS Form 5471 (Controlled Foreign Corporation rules); and/or
• Global Intangible Low-Tax Income (GILTI) inclusion on their annual U.S. tax return, potentially leading to double taxation.

Planning Tip: Use professional cross-border tax advice before setting up or transferring shares in a Canadian corporation involving a U.S. person.

Real Estate
Canadian principal residences are fully exempt from Canadian capital gains tax, but not from U.S. tax. When a U.S. citizen sells their Canadian home, they may owe U.S. capital gains tax unless the IRC Section 121 exclusion (USD $250K per U.S. person) applies. Even then, the U.S. person may owe tax to the U.S. for gains in excess of USD $250K, with no foreign tax credit as the gain in Canada was fully eliminated using the Canadian Principal Residence Exemption.

Coordinated Planning and Asset Titling

The couple’s entire financial picture—including account titling, beneficiaries, Wills, and powers of attorney—must be harmonized across both jurisdictions.

Titling Recommendations:

• Avoid joint accounts that may trigger U.S. gift reporting.
• Refrain from naming a U.S. citizen as the joint owner of Canadian assets (especially corporate shares or trusts) without advice.

Conclusion

A Canadian couple with a U.S. citizen spouse is not just navigating two tax systems—they are navigating two entire legal, regulatory, and financial ecosystems. Mistakes can be costly, but with proactive, customized planning, cross-border families can achieve their financial goals while minimizing exposure to unnecessary taxes or compliance risks.

At Cardinal Point Wealth Management, we help cross-border couples with integrated tax, estate, and investment strategies tailored to their unique cross-border lives. If your family includes a U.S. citizen living in Canada, our team is ready to help you secure your financial future on both sides of the border.