By: Florence Marino B.A., LL.B., TEP | Vice President, Tax & Estate Planning
These are turbulent times. Against the backdrop of the changing US tariff landscape, the One Big Beautiful Bill Act (OBBBA) brought about its own amount of disruption. The OBBBA became law on July 4, 2025.
Countries with “unfair foreign taxes” breathe a sigh of relief
One of the more controversial measures for Canadian government entities, corporations, trusts and individuals – section 899, entitled “Enforcement of Remedies against Unfair Foreign Taxes” – was removed. This would have levied a surtax on US source income and withholding taxes in respect of countries deemed to levy unfair foreign taxes. This was dropped from the final bill on June 26, 2025, after an agreement was reached with the G7 to exclude US multinationals from OECD Pillar II global corporate minimum tax measures that implemented undertaxed profit rules. By adopting OECD Base Erosion and Profit Shifting Pillars I and II and having passed the now promised to be repealed Digital Services Tax, Canada was presumed to be on the unfair country list.
US Estate Tax Exemption Threshold – Permanently fixed
The OBBBA was a massive bill. From an estate planning perspective, the measures relating to the threshold for exemption from US Estate tax are of interest to us.
The final legislation permanently increases the estate, gift and generation-skipping transfer tax basic exclusion amount from USD$ 13.99 million to USD$ 15 million for US individuals effective January 1, 2026. (Married spouses can share double this amount.) The basic exclusion amount will be indexed to inflation for subsequent years. And there is no sunset.
The 2017 Tax Cuts and Jobs Act had doubled the basic exclusion amount (to USD$ 10 million) but the increase was going to sunset at the end of 2025 bringing back a prior lower exclusion amount (the pre-2018 exemption of USD$ 5 million, indexed to inflation or approximately USD$ 7 million for 2026). The OBBBA not just preserves but further increases the exemption threshold. With no sunset, this will allow estate planning with greater certainty.
Quantifying the amount of the problem, if any, can now, at least, be certain.
Who should care – US persons living in Canada and Canadians with US situs assets
The tax laws of the US apply to all US citizens no matter where they reside. This means that US citizens who are residents of Canada, not only must comply with US income tax laws but also are subject to US estate and gift taxes.
Canadians who are neither US citizens nor US residents are only subject to estate tax in respect of US situs assets. These would include shares or debt of US corporations (even if held within a Canadian registered plan), US real property, and tangible personal property in the US. There is a tax treaty between Canada and the US that allows a pro-rated unified credit. The credit is pro-rated using the ratio of the value of US situs property to the value of the total worldwide estate. This prorated unified credit will effectively exempt US situs assets from estate tax if the worldwide estate value is not more than the basic exclusion amount (currently at USD$ 13.99 million).
Planning complexity
Reducing the impact of potential US estate taxes can involve US persons making gifts during life up to certain permitted amounts as well as the use of trusts. Planning to address potential US estate tax liabilities that will arise in respect of estate values in excess of the basic exclusion amount need specific and specialized expertise. Consulting tax and legal advisors in all relevant jurisdictions (including federal, provincial, state and municipal) is important.
While in general, life insurance may be purchased to fund estate tax liabilities, specific planning is required to mitigate the impact of the death benefit increasing the value of the estate and thus adding to the potential estate tax liability. In response to this issue, life insurance on US persons may generally be held in an irrevocable life insurance trust (ILIT). However, there are other complications. One of the concerns is that a Canadian life insurance policy may present current US income tax issues. Just as with a Canadian resident holding a foreign life insurance policy (see Moving to Canada with foreign life insurance – Tompkins Insurance) the ILIT would have to assess if the Canadian policy meets US rules governing the beneficial tax treatment of life insurance under the US Internal Revenue Code. Actuarial expertise is required to assess this question.
This is a mere highlight of one aspect of the complexity involved.
And the good news is?
At least there is some good news. The OBBBA has permanently increased the estate tax exemption threshold to a historically high amount which will track inflation. Beyond that complex, iterative and often mis-matched planning is unfortunately the norm.
FOOTNOTE:
This publication is protected by copyright. Tompkins Insurance is not engaged in rendering tax or legal advice. TOMPKINSights contains a general discussion of certain tax and legal developments and should not be construed as tax or legal advice.
Should you wish to discuss this or any other TOMPKINSights article, please contact
florence@tompkinsinsurance.com
