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Southbound Investment – Tax, Estate, and Financial Planning for Canadians Buying U.S. Real Property

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Every year, thousands of Canadians head south in search of sunshine, golf courses, and winter respite. For many, these seasonal escapes lead to something more permanent –ownership of real property in the United States. Whether it’s a Florida condo, an Arizona vacation home, or an investment property in California, Canadians represent one of the largest foreign buyer groups in the U.S. real estate market.

But while the lifestyle perks are obvious, the cross-border tax and estate implications are not. Canadians purchasing U.S. real estate must navigate a complex web of rules involving U.S. estate tax, potential gift tax, Canadian tax reporting, and appropriate ownership structures, all of which can materially affect the total cost of ownership, inheritance planning, and long-term family wealth.

Canadian Snowbirds - Cross Border

At Cardinal Point Wealth Management, we specialize in helping Canadians manage their cross-border financial lives. In this blog, we explore what Canadians need to know—before signing on the dotted line—to ensure their U.S. real estate investment aligns with broader tax, estate, and financial goals.

The Allure of U.S. Property Ownership

Canadian ownership of U.S. real estate is not a new phenomenon. In fact, Canadians consistently top the list of foreign buyers, driven by:

  • Attractive property prices compared to major Canadian cities.
  • Warmer climates and golf/resort communities.
  • Investment opportunities and rental income potential.
  • Diversification of real estate holdings.

However, many Canadians make real estate purchases with little or no legal or tax planning, leading to costly estate tax exposure and probate delays when the owner dies.

U.S. Estate Tax Exposure for Canadian Owners

Unlike Canada, the United States imposes an estate tax on the fair market value of property owned at death. While U.S. citizens and residents enjoy a high unified credit (USD $13.99 million in 2025), non-resident aliens (NRAs)—such as Canadian residents—face a much lower reporting threshold to the IRS.

Key U.S. Estate Tax Concepts for Canadians:

  • U.S. real property is considered a U.S. situs asset, subject to U.S. estate tax at death.
  • NRAs receive a $60,000 estate tax exemption, not the full USD $13.99 million (2025).
  • U.S. estate tax rates range from 18% to 40%.
  • The Canada–U.S. Tax Treaty can offer relief through the pro rata application of the unified credit and a spousal deferral, but these still require correct and timely reporting to the IRS to qualify.

Example: A Canadian dies owning a $1.5 million Florida condo. U.S. estate tax may apply to the full value (less $60,000 exemption), even if no U.S. income tax was ever paid. Through correct and timely reporting to the IRS, it is possible to eliminate this U.S. estate tax if the Canadian’s total estate is under USD $13.99 million (2025).

Understanding the Canada–U.S. Tax Treaty Relief

Article XXIX-B of the Canada–U.S. Tax Treaty offers partial relief from U.S. estate tax for Canadians. It allows Canadian residents to claim a proportionate share of the unified credit, based on the ratio of U.S. situs assets to worldwide assets.

How It Works:
If the U.S. property represents 10% of the decedent’s worldwide estate, the Canadian estate may claim 10% of the unified credit (e.g., 10% of USD $13.99M = USD $1.39M exemption).

Caveats:

  • The estate must disclose worldwide assets to the IRS to claim the treaty credit.
  • The relief may not fully eliminate U.S. estate tax for large or U.S.-concentrated estates.
  • No marital deduction is allowed for assets passing to a non-U.S. citizen spouse unless a Qualified Domestic Trust (QDOT) is used.

Structuring Ownership to Minimize Estate Tax Exposure

Canadians purchasing U.S. real estate should evaluate how to structure the ownership in order to limit U.S. estate tax exposure. Options include:

A. Direct Ownership (Personal Title)

  • Simplest and most common method.
  • U.S. estate tax applies based on property’s FMV at death.
  • Probate is required.
  • May be suitable for lower-value properties and older owners.

B. Joint Ownership with Spouse

  • If both spouses are Canadian, the entire value may be subject to U.S. estate tax on the second death.
  • If one spouse dies first, the value of their interest is typically included in their U.S. gross estate.
  • No unlimited marital deduction unless the surviving spouse is a U.S. citizen.

C. Canadian Corporation

  • Property is owned by a Canadian corporation; shares are held by individual(s).
  • May eliminate U.S. estate tax (shares of a foreign corporation are not U.S. situs).
  • Adds administrative cost, complexity, and potential double taxation.
  • Personal use of corporate-owned property may result in shareholder benefit tax under Canadian rules.

D. Canadian Trust

  • Trust holds U.S. property for family members.
  • Trust may be domestic (Canadian) or foreign (U.S.).
  • May offer probate avoidance and estate tax planning benefits.
  • Triggers complexity, ongoing compliance, and potential U.S. grantor trust or accumulation rules if U.S. beneficiaries exist.

E. U.S. Limited Liability Company (LLC)

  • Not generally advisable for Canadians.
  • LLCs are “flow-through” for U.S. tax but not recognized as such in Canada.
  • May result in double taxation with no foreign tax credit relief, as well as the possible issues mentioned for the Canadian Corporation.

Gift Tax Considerations: Transferring U.S. Real Property

The U.S. also imposes gift tax on transfers of U.S. real property by NRAs. Key rules include:

  • U.S. gift tax applies to direct gifts of U.S. real property (unlike in Canada).
  • No annual exclusion for gifts to non-spouse recipients beyond USD $19,000 (2025).
  • Gifts between spouses are not exempt unless the recipient is a U.S. citizen.
  • Form 709 (U.S. Gift Tax Return) must be filed for taxable transfers.

Planning Tip: Never transfer U.S. real property to children or other individuals without tax advice. Consider trust or corporate structures to facilitate controlled and tax-efficient succession.

Income Tax Considerations for Rental Property

If the U.S. property generates rental income, Canadian owners must:

  • File U.S. income tax returns (Form 1040-NR) annually.
  • Withhold 30% gross rental income unless electing net income treatment (Form W-8ECI).
  • Report rental income on their Canadian return as well.

Tax treaties and foreign tax credits help prevent double taxation, but:

  • Depreciation is required in the U.S. but is discretionary in Canada.
  • Exchange rate fluctuations must be tracked for reporting gains/losses on eventual sale.

Selling U.S. Property: FIRPTA Withholding

When a Canadian sells U.S. real property, the Foreign Investment in Real Property Tax Act (FIRPTA) applies. Key implications:

  • The buyer must withhold 15% of gross proceeds, not net gain.
  • The seller may apply for a withholding certificate (IRS Form 8288-B) to reduce or eliminate the withholding.
  • Final U.S. tax is based on actual gain, taxed at capital gains rates (15–20% depending on holding period and gain size).
  • Capital gains must also be reported in Canada (foreign tax credits generally apply to eliminate double tax).

Probate and Legal Issues

If a Canadian dies owning U.S. real estate personally:

  • The estate may require U.S. probate in the state where the property is located.
  • Probate can be slow, costly, and public.
  • U.S. property may not pass per a Canadian Will unless recognized or supplemented by local documents.
  • Consider using a cross-border estate plan to avoid U.S. probate.

Insurance and Estate Liquidity

Because of potential estate tax exposure, Canadians owning U.S. real estate should:

  • Estimate potential U.S. estate tax at death (based on projected FMV).
  • Consider purchasing life insurance to fund the anticipated tax liability.
  • Ensure liquid Canadian assets are available to the estate, as the IRS may impose liens on U.S. real property pending payment of tax.

Currency Exchange and Financing

Currency Considerations:

  • Purchase price and operating expenses are in USD.
  • Currency exchange rates can materially affect affordability and return on investment.
  • Consider using multi-currency bank accounts and hedging strategies for large transfers.

Financing:

  • Canadian buyers may obtain U.S. mortgages, but underwriting can be more rigorous.
  • Some prefer to finance in Canada and transfer funds.
  • Interest expense on a mortgage used to acquire or improve rental property may be deductible for U.S. tax purposes.

Conclusion

Buying U.S. real estate can be a rewarding investment and lifestyle decision for many Canadians, but the tax, estate, and legal considerations are not to be taken lightly. Without proper planning, a simple vacation home can trigger estate tax liability, probate headaches, double taxation, and complexity for future heirs.

The good news? With early, informed guidance, Canadians can structure their U.S. real estate holdings in a way that is tax-efficient, estate-friendly, and aligned with their long-term goals.

At Cardinal Point Wealth Management, we help Canadians navigate every stage of U.S. real estate ownership—from acquisition to succession—with cross-border tax, estate, and financial planning expertise. If you’re considering purchasing U.S. property, let’s discuss how to optimize your plan and protect your investment across borders.