Does Canada really have no estate tax? The real gap between the two countries' death taxes

I wrote earlier about the difference between Canadian and US capital-gains taxes. The sharpest reader comment on that piece was:

“The author brushes past estate tax far too lightly. For an ordinary person the real rate is 25% vs 0.”

The criticism is fair. In that piece I judged “Canada’s deemed disposition at death vs the US step-up” from the point of view of system design, and argued Canada’s approach is more efficient and leaves no loophole. I still hold that view. But I never worked out the actual tax bill for an ordinary family, and that is what most people care about.

This piece fills the gap.

1. A definition first

Some readers said “Canada has no estate tax”. Literally true: Canada abolished estate and inheritance taxes in 1972, and neither the federal government nor any province levies one.

But no estate tax does not mean no tax at death. Canada reaches a similar result by another mechanism:

Deemed disposition. When a taxpayer dies, the tax law assumes they sold all their assets at fair market value the instant before death. Every unrealised capital gain is realised at once and taxed on the final return (the terminal return).

The difference is what gets taxed:

• An estate tax is levied on the total value of the assets.
• Deemed disposition is levied on unrealised appreciation.

So the burden falls in completely different places. Buy-and-hold assets with large gains fare worst under the Canadian system; cash and assets whose cost is close to market value are barely affected.

2. Working out the numbers

Scenario one: a stock portfolio in a non-registered account

Suppose you die holding a non-registered investment account with a cost of C$300,000, a market value of C$1,000,000, and an unrealised gain of C$700,000.

Canada:

• 700,000 × 50% inclusion rate = 350,000 added to the final return
• That income sits on top of everything else earned that year and almost certainly lands in the top marginal bracket (about 54% in Nova Scotia)
• Tax bill of roughly C$180,000 to 190,000, or 26% of the total gain

United States:

• The heir’s cost basis is reset to the date-of-death value of $1,000,000 (step-up in basis)
• The $700,000 unrealised gain disappears permanently; the heir can sell the next day and owe nothing
• The estate is far below the $15 million exemption, so no estate tax
• Tax bill: 0

The commenter’s “25% vs 0” is right in both direction and magnitude.

Scenario two: the family home

Canada: the principal residence exemption makes it fully tax-free. Nothing owed.

United States: the §121 exclusion allows $250,000 for a single person and $500,000 for a couple tax-free, but more importantly the step-up at death lifts the basis to market value, so unrealised appreciation goes to zero here too.

On this item the two countries are level, with the US slightly ahead. So the rebuttal “my parents’ house won’t be taxed” is correct, but it misses where the real difference lies.

Scenario three: RRSP / RRIF, the sharpest cut

Almost nobody raised this one, and it bites harder than capital gains.

At death, the entire balance of an RRSP or RRIF is included at 100% on the final return as income for that year. Not 50%. All of it.

A C$600,000 RRSP adds C$600,000 of taxable income to the last return, straight into the top bracket. The bill can exceed C$300,000.

There is a buffer: a spouse or a dependent child can take a tax-free rollover, which defers the tax until the spouse dies. But after both spouses have died, this cut cannot be avoided, only postponed.

In the US, an inherited traditional IRA or 401(k) is also taxed as income (since the SECURE Act, generally within ten years). The direction is the same in both countries, but the US allows far more room to spread it out, and has nothing like Canada’s “everything in one year at the top rate” effect.

Scenario four: deferral between spouses

Canada allows a spousal rollover: assets pass to the spouse at their original cost without triggering deemed disposition. So the first death usually produces no tax; the bill concentrates on the second death.

That means the real burden arrives later and more concentrated than people expect. An 80-year-old widow or widower may realise, at death, two people’s entire lifetime of unrealised gains at once.

3. The full picture on the US side

The numbers readers quoted are accurate; I checked:

For 2026 the US federal estate and gift tax exemption is $15 million per person, $30 million per couple with portability; the excess is taxed at 40%; from 2027 it is indexed to inflation.

This is the result of the One Big Beautiful Bill Act (OBBBA, P.L. 119-21) signed on 4 July 2025. It removed the sunset clause that would have ended the TCJA exemption at the end of 2025, and fixed the exemption permanently at $15 million instead of letting it fall back to about $7 million.

In practice, fewer than 0.1% of people who die owe federal estate tax.

Two things need adding, or this becomes misleading in the other direction:

1. States have their own estate taxes. A high federal exemption does not mean zero tax everywhere. Oregon’s threshold is $1 million, Massachusetts $2 million, Washington about $2.19 million, Minnesota $3 million, New York about $7.16 million. OBBBA does not touch these, and middle-class families in those states are still exposed.

2. Canada is not entirely free either. Provinces charge probate fees, about 1.5% in Ontario and varying elsewhere. Far smaller than income tax, but not zero.

4. A trap almost nobody knows: Canadians holding US stocks may owe US estate tax

This is the point I most wanted to write down, because it directly affects most of the people reading this.

The US levies estate tax on non-residents’ US-situs assets. Shares of US companies are US-situs, including the AAPL, NVDA and TSLA sitting in your IBKR or Questrade account.

The statutory exemption for non-residents is only $60,000. Above that, rates run from 18% to 40%, with 40% applying from $1 million.

That sounds terrifying. The good news is that the Canada–US tax treaty (Article XXIX-B) provides relief: a Canadian resident can claim a pro-rated share of the full US exemption, in the proportion:

US-situs assets ÷ worldwide estate

Example: a Canadian resident dies with a worldwide estate of $20 million, of which $2 million is US stocks.

• Proportion = 2 / 20 = 10%
• Available exemption = $15 million × 10% = $1.5 million
• Taxable portion = $2 million − $1.5 million = $0.5 million
• Tax roughly $200,000

The practical conclusion: only people whose worldwide estate exceeds $15 million actually pay this tax. The vast majority never will.

But the filing threshold is far lower. If a Canadian resident dies holding more than $60,000 of US-situs assets, the executor must file Form 706-NA, even if the final tax is zero.

Many long-term investors in US stocks crossed $60,000 long ago without knowing this exists. It is also why some people hold US stocks indirectly through Canadian-listed ETFs (a TSX-listed S&P 500 tracker, for example): units of a Canadian mutual fund trust are generally treated as non-US-situs, which sidesteps the issue.

5. Conclusion

Back to that comment. The corrected statement should be:

On the dimension of passing wealth to the next generation, the US system’s advantage for ordinary middle-class to high-net-worth families is overwhelming. Step-up in basis makes unrealised gains vanish between generations, and the $15 million / $30 million exemption keeps 99.9% of families outside estate tax altogether. Canada’s deemed disposition detonates a lifetime of paper gains on the final return, at the top rate, for an effective burden of about 25% of the total gain, and RRSP / RRIF balances are included at 100%.

But that does not change the judgement in the earlier piece: Canada’s system is more neutral, and the US system is less efficient. Step-up creates an extreme lock-in effect. An elderly investor with large unrealised gains should, rationally, never sell, so capital stays frozen in assets that perhaps should have been sold long ago. That is a cost borne by society as a whole; it just never shows up on anyone’s tax bill.

Whether a system is good for an individual, and whether it is well designed, are two different questions. The earlier piece was about the second; the readers cared about the first. Both hold, and they don’t conflict.

If most of your assets are in non-registered accounts, or you own a second property, or your RRSP balance is substantial, Canada’s tax at death is worth planning for in advance: insurance, realising gains gradually, charitable giving and corporate structures all have a role. That needs a licensed accountant and an estate planner. It is not something one article can settle.

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This is a general comparison of two systems, not personal tax or estate-planning advice. All figures are 2026 values. Actual treatment depends heavily on your province or state, asset mix and account types; consult a licensed professional. 中文版.