CRA explains the credit for US estate taxes under Art XXIX-B(6)(a) of the Canada-US treaty

A Canadian resident who was not a U.S. citizen was subject on death to U.S. estate tax on U.S. situs property, namely, US real property and shares of a U.S. public corporation – and also realized a gain pursuant to ITA s. 70(5). Could the executor claim a credit in Canada respecting the U.S. estate tax paid where:

(i) the value of the deceased’s entire gross estate was equal to, or lower than, U.S. $1.2 million; or

(ii) such value exceeded U.S. $1.2 million?

CRA indicated that in the first scenario, the executor could claim a tax credit in accordance with Art XXIX-B(6)(a)(i) of the Canada-US treaty for the US estate tax paid on the US realty against the Canadian federal tax otherwise payable on the gain from the deemed disposition of the US realty. In particular, such gain was deemed to arise in the US, so that Art XXIX-B(6)(a)(i) could be accessed. Not so for the gain on the US shares.

Regarding the second scenario, the executor could claim a credit also in relation to the gain from the deemed disposition of the US shares against the Canadian capital gains tax, given that Art XXIX-B(6)(a)(ii) referenced any income, profits or gains of the individual from property situated in the U.S. - and the postamble to Art. XXIX-B(6) stated that property is situated within the U.S. if it is so treated for U.S. estate tax purposes.

Neal Armstrong. Summary of 4 June 2024 STEP Roundtable, Q.11 under Treaties – Income Tax Conventions – Art. 29B.