As Canadians increasingly maintain global ties—through family, business, or retirement—cross-border estate planning has become more critical than ever. A common scenario arises when a Canadian resident intends to leave assets to a child or grandchild who lives in the United States, either as a U.S. citizen or resident. While naming a U.S. beneficiary in a Canadian Will may seem simple, doing so without proper planning can have unintended tax consequences, both for the estate and the beneficiary.

At Cardinal Point Wealth Management, we specialize in assisting clients with complex cross-border estate and financial planning. This article explores the key tax, estate, and financial considerations when a Canadian resident leaves assets to a U.S. person, especially in the context of trusts, corporations, and investment holdings.

The U.S. Tax System Follows Its Citizens—Everywhere

Unlike Canada, the United States taxes its citizens and permanent residents on their worldwide income, regardless of where they live or where the assets originate. As such, a Canadian resident who names a U.S. person as a beneficiary must consider not only the Canadian tax implications but also how the gift or bequest will be treated under U.S. tax law.

Common Scenarios Involving U.S. Beneficiaries:

A Canadian parent bequeaths their estate to an adult child who has moved to the U.S. for work.
A grandparent in Canada sets up a trust for a U.S.-based grandchild.
A Canadian investor dies holding shares in a Canadian private corporation, which are inherited by a U.S. person.

Each of these scenarios can create complex U.S. tax exposure that should be managed proactively.

Canadian Tax Treatment of Bequests to U.S. Beneficiaries

In Canada, there is no estate tax. Instead, a deemed disposition of assets occurs at death, triggering capital gains tax on accrued gains. The estate pays any resulting tax, and beneficiaries receive assets at fair market value (FMV) as of the date of death.

For example, if a Canadian leaves $1 million of appreciated securities to a U.S.-resident child, the Canadian estate will realize and pay capital gains tax on the appreciation. The child receives the assets with a stepped-up cost basis for Canadian purposes, but not necessarily for U.S. tax purposes.

This difference in basis can cause double taxation when the U.S. beneficiary eventually sells the asset, unless planning is done to align tax treatment between the two countries.

U.S. Tax Considerations for Inherited Canadian Assets

Basis Mismatch

The U.S. generally provides a step-up in basis for inherited assets received from a decedent. However, if the decedent was not a U.S. person and their estate is not subject to U.S. estate tax, the IRS may not recognize the Canadian cost basis reset. This can result in the U.S. beneficiary being taxed on the entire gain from the original Canadian acquisition cost.

Passive Foreign Investment Companies (PFICs)

Many Canadian mutual funds and ETFs are treated as PFICs under U.S. tax law. When a U.S. beneficiary inherits a portfolio that includes PFICs, they are required to:

File annual IRS Form 8621 for each PFIC;
Choose a taxation method (default regime, mark-to-market election, or QEF election); and
Possibly pay punitive tax rates and interest charges on distributions or gains.

Failure to comply can result in significant penalties, even if the funds were inherited and no income was received.

Controlled Foreign Corporations (CFCs)

If the Canadian decedent owned a Canadian private corporation, and a U.S. beneficiary inherits 10% or more of the voting shares, the company may be classified as a CFC. The corresponding consequences for the U.S. shareholder include:

Must file Form 5471 annually;
Potentially subject to subpart F income inclusion rules; and
Exposure to GILTI (Global Intangible Low-Taxed Income) tax if the corporation is profitable.

These rules are highly complex and require specialized cross-border tax advice.

Structuring Inheritances Through Trusts

Leaving assets to a U.S. beneficiary in a trust can provide asset protection, guard against spendthrift behavior, and support minor or disabled beneficiaries. However, when a Canadian resident settlor establishes a trust for a U.S. beneficiary, multiple tax and reporting regimes come into play.

Trust Residency and Situs

The key issues involve determining:

The residency of the trust for tax purposes (Canada vs. U.S.);
The situs of the trust, especially for legal and reporting obligations; and
Whether the trust is a “foreign trust” under U.S. law.

A trust will generally be deemed a foreign trust for U.S. purposes if it is not governed by U.S. law and does not have a U.S. trustee with primary control.

U.S. Reporting Requirements

U.S. beneficiaries of foreign trusts must file:

Form 3520: For distributions from or connections to a foreign trust.
Form 3520-A: Filed by the trust annually (often the responsibility of the beneficiary in the absence of a U.S. trustee).

Penalties for non-filing are substantial: the greater of $10,000 or 35% of the gross reportable amount (for example, the value of distributions received).

Accumulation Distribution Rules

If the trust does not distribute income annually, and instead accumulates it over time, U.S. beneficiaries may be subject to the accumulation distribution rules. This causes:

Distributions to be taxed at the highest U.S. marginal tax rate;
Additional interest charges on the deferred income; and
Complexity in calculating “undistributed net income” (UNI) using IRS “throwback” rules.

This can turn an otherwise beneficial structure into a tax trap if not planned carefully.

Planning Recommendations for Trusts with U.S. Beneficiaries

To manage the U.S. tax consequences of Canadian trusts:

Consider creating a U.S. domestic trust if long-term U.S. beneficiaries are intended.
Structure distributions to avoid the accumulation of income where possible.
Avoid holding PFICs or Canadian private corporations inside the trust.
Engage a cross-border trustee or advisor to maintain compliance throughout the life of the trust.

Life Insurance and Registered Accounts

Life Insurance Proceeds

Life insurance proceeds paid to a U.S. beneficiary are not taxable income under U.S. law. However, the structure must be correct:

If the beneficiary is a U.S. person, and the owner is Canadian, this is generally fine.
If a trust is the beneficiary, and the trust has U.S. beneficiaries, PFIC or accumulation issues may arise.

RRSPs and RRIFs

Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) can be left to a U.S. beneficiary. However:

The U.S. beneficiary must include distributions in their U.S. taxable income.
The Canada–U.S. tax treaty limits Canadian withholding tax on distributions to 15% for “periodic payments”, but 25% Canadian withholding tax on larger distributions.
The beneficiary may be able to claim a foreign tax credit for Canadian tax paid.

Gifts vs. Bequests: Why Timing Matters

Giving property during life vs. after death creates different tax outcomes.

Lifetime Gifts:

In Canada, a gift triggers a deemed disposition with capital gains tax payable by the donor.
In the U.S., a gift from a nonresident alien is not subject to U.S. gift tax but may be reportable by the U.S. recipient if over $100,000 (via Form 3520).
Gifts of Canadian mutual funds, private company shares, or trust interests can create significant U.S. tax complications for the recipient.

Bequests at Death:

May allow for Canadian tax deferral (e.g., to a spouse).
May create more favorable cost basis treatment, though this is not guaranteed under U.S. law.

Planning should take into account the timing, structure, and asset type when choosing between gifting and bequest strategies.

Real Estate Inheritance

When Canadian real estate is left to a U.S. person, consider:

Capital gains tax payable by the Canadian estate on deemed disposition;
Property tax reassessment risks in provinces like B.C. or Ontario;
U.S. tax implications if the property is later sold by the U.S. heir; and
Canadian foreign ownership rules and compliance.

If the Canadian real estate property is a rental:

The U.S. beneficiary must report rental income to both CRA and the IRS.
Deductions and depreciation rules differ, which may create tax mismatches.

Currency Exchange and Withholding Tax

U.S. beneficiaries receiving assets in Canadian dollars may face:

Exchange rate risk and currency conversion complications.
Canadian non-resident withholding tax on income or capital gains distributed post-mortem (typically 25% but can be reduced under the Canada-U.S. Tax Treaty to 0%-15% depending on the type of income).

Ensure executors are aware of the tax withholding rules and file the necessary NR4 or T2062 forms with CRA.

Conclusion

Leaving an inheritance to a U.S. citizen or resident is entirely possible—but not without its pitfalls. Without proper planning, Canadian estates can inadvertently burden their U.S. beneficiaries with tax liabilities, reporting obligations, and even penalties.

Whether you’re a Canadian parent with U.S.-resident children or a grandparent planning for U.S.-born grandchildren, it’s critical to consult cross-border tax and estate professionals who understand the interplay between Canadian and U.S. law.

At Cardinal Point Wealth Management, we help families navigate these issues with integrated financial, tax, and estate planning advice tailored to their cross-border lives. If your estate plan includes a U.S. beneficiary, we invite you to speak with one of our cross-border specialists to ensure your legacy is preserved on both sides of the border.

Cross-Border Bequests – Planning for U.S. Beneficiaries of Canadian Estates