The Impact of U.S. State Death Taxes on Canadians

When Canadians invest in or own property in the United States, they often focus on the benefits of real estate, business opportunities, and lifestyle. However, one important topic that many overlook is U.S. state death taxes. These taxes can have a big impact on how much wealth your family actually receives after you pass away. Understanding how they work is an essential part of U.S. and Canada financial planning.

In the United States, there are two main types of taxes that may apply when someone dies: the federal estate tax and state-level death or inheritance taxes. The federal estate tax applies to estates over a certain value threshold, which is currently very high—over $13 million (USD) per person in 2025. Because of this large exemption, most people are not affected by the federal estate tax. However, state-level taxes can be much more complicated and can apply at lower values.

Not every U.S. state charges death taxes, but several do. For example, states such as New York, Massachusetts, Oregon, Washington, and Maryland have their own estate or inheritance taxes. These states may tax the value of property located within their borders, even if the owner is not a resident. This means that if a Canadian owns a vacation home, condo, or investment property in one of these states, their estate could face a state death tax after their passing.

Let’s say a Canadian resident owns a small vacation home in Oregon worth $1 million. Even though that value might not seem extremely high, Oregon’s estate tax starts at just $1 million, and rates can range from 10% to 16%. This means the estate could owe as much as $160,000 in state death tax, even before considering other taxes or legal fees. That is a large amount that could reduce the inheritance left for your loved ones.

These taxes are especially important to consider in dual-country financial planning because Canadians are also subject to Canadian tax rules. While Canada does not have an estate tax like the U.S., it does have a deemed disposition rule. This means that when a Canadian dies, all their assets are considered sold at fair market value, and any capital gains are taxed. So, if a Canadian dies owning U.S. property, their estate could face both Canadian capital gains tax and U.S. state death tax on the same asset. Without careful planning, this can lead to double taxation and unnecessary financial loss.

There are ways to reduce or avoid these taxes through smart planning. One common method is to hold U.S. assets in a cross-border trust. A properly structured trust can help control how property is passed on and sometimes minimize or defer taxes. Another option is to consider owning U.S. real estate through a Canadian corporation or a limited liability company (LLC), though these structures must be handled carefully to avoid creating more tax problems.

It is also important to understand that some states have inheritance taxes rather than estate taxes. Estate taxes are paid by the estate before the assets are distributed, while inheritance taxes are paid by the individual who receives the inheritance. For example, in Maryland, there is both an estate tax and an inheritance tax. This can create an extra layer of complexity for Canadian heirs who are receiving property or money from someone who lived or owned property in such a state.

Working with a professional who specializes in U.S. and Canada financial planning can make a huge difference. Cross-border financial advisors and tax professionals understand the laws in both countries and can help create strategies that protect your wealth. They can also help you decide whether selling U.S. property, transferring ownership, or updating your will is the best step for your situation.

In the end, the key message is simple: owning property or investments in the U.S. can bring great opportunities, but it also comes with responsibilities and tax risks. Taking the time to understand U.S. state death taxes and how they interact with Canadian tax laws can save your estate thousands of dollars. With thoughtful preparation, proper advice, and effective dual-country financial planning, Canadians can make sure their cross-border assets are managed wisely and passed to their heirs in the most tax-efficient way possible.