Advanced Cross-Border: When Parents or Children Are Non-Residents — Extra Canadian Property Inheritance Taxes & Filings

Core Conclusions (BLUF)

1. Whether a party is a “non-resident” sets the entire tax workflow. Canada has no “estate tax”, but it recovers tax through two mechanisms: the deemed disposition triggered at death, generating capital gains tax, and the withholding tax on payments to non-residents (Section 116 / Part XIII). The moment one side of the transaction is a non-resident, the Canada Revenue Agency (CRA) requires additional compliance certificates and a higher withholding rate.
2. Canadian property held / sold / inherited by a non-resident: must run the Section 116 Certificate of Compliance process, with the withholding rate raised from 25% to 35% effective January 1, 2025 (still up to 50% for depreciable property). This is the single most consequential change from 2025 onward.
3. Canadian-resident children inheriting property in Mainland China or Hong Kong: Canada does not tax the inheritance itself; but if the total cost of “specified foreign property” (rental real estate, foreign deposits, etc.) held at any time during the year exceeds CAD 100,000, a T1135 filing is mandatory. Personal-use vacation homes are excluded from this threshold.
4. A Canadian-resident parent dies and leaves Canadian property to a non-resident child: the parent’s final-year T1 reports the deemed disposition as normal; afterwards, any payment generated by the estate or property and paid to the non-resident child (rent, trust distributions) is subject to Part XIII 25% withholding, reducible to the treaty rate where applicable (under the Canada-China treaty, rent generally remains 25%; an NR6 + Section 216 election can switch the basis to net withholding with a final return).
5. Cross-border Canada-US: starting in 2026, the One Big Beautiful Bill Act (OBBBA) has permanently fixed the US federal estate tax lifetime exemption at USD 15M per person (USD 30M for a married couple), eliminating the legislative “2026 sunset” risk built into the TCJA. But a Canadian resident leaving US-situs real estate behind still has to rely on Article XXIX-B of the Canada-US treaty to claim the pro-rata unified credit.
6. Three 2026 policy updates to monitor:
   • Underused Housing Tax (UHT): pursuant to Bill C-15 receiving Royal Assent on March 26, 2026, the tax is repealed beginning with the 2025 tax year, with no further filings or payments owing; late-filing penalties for the 2022–2024 years remain on the books.
   • BC Speculation and Vacancy Tax (SVT): starting in 2026, the foreign-owner rate rises from 2% to 3%; the Canadian-resident owner rate rises from 0.5% to 1%.
   • Federal Prohibition on the Purchase of Residential Property by Non-Canadians Act: the ban has been extended to January 1, 2027, but inheritance, divorce and gifts do not count as “purchases” — title can still pass.

I. Scenario A — Non-Resident Parent Dies, Canadian Property Goes to Canadian-Resident Child

1. The deemed disposition at death still applies

A non-resident is not taxed in Canada on worldwide income, but any “Taxable Canadian Property (TCP)” they hold — including Canadian real estate — is deemed to have been disposed of at fair market value at the moment of death (Income Tax Act, s. 70(5)). The capital gain (FMV − ACB, then × the taxable inclusion rate) generates federal and provincial tax in Canada. Canada retains the right to tax its in-country immovable property, and no tax treaty waives that right (logic of OECD Model Article 13(1); the Canada-China and Canada-US treaties both follow this).

2. Section 116 and the “instant of death” — a common misconception

Strictly, the s. 70(5) deemed disposition is not subject to the Section 116 certificate requirement (CRA Technical Interpretation 2013-0493911E5). But in practice:

Strict view: The s. 70(5) "instant of death" deemed disposition
            → Not subject to the Section 116 certificate

But in practice:
• When the executor / beneficiary later actually sells or transfers
  the property, if the estate / heir is a non-resident, that disposition
  still has to run through Section 116
• If the estate is first distributed to a Canadian-resident child
  and then sold, it is a Canadian-resident disposition
  → Section 116 no longer required

So whether a Section 116 Certificate of Compliance is needed depends on whether the owner at the moment of distribution / sale is a non-resident.

3. Section 116 Certificate of Compliance and withholding rates (current as of 2026)

When a non-resident disposes of Canadian property (whether during life or in the estate phase), the buyer is obligated to withhold from the gross proceeds:

• 35% (effective January 1, 2025; previously 25%) for non-depreciable property (ordinary residential housing);
• 50% for depreciable property (e.g., the building portion of a rental condo).

The seller should file T2062 (non-depreciable) or T2062A (depreciable) before the transaction. After review, the CRA issues a T2064 / T2068 Certificate of Compliance based on the estimated capital gain, dropping the effective withhold to “gain × 35%”. Excess funds can be released back into the closing.

Withholding rates from 2025-01-01:
  Non-depreciable property (ordinary residential) → 35% (was 25%)
  Depreciable property (rental condo building)    → 50%

Application path:
  T2062 / T2062A → CRA review → T2064 / T2068 Certificate of Compliance
  → Withholding calculated on estimated capital gain × 35% (not gross × 35%)
  → Excess withhold released back into closing, settled via lawyer's trust account

Key reminder: The 35% rate was announced in the 2024 Federal Fall Economic Statement and took effect from 2025. Canadian tax practitioners (Welch LLP, Marcil Lavallée, etc.) have already adopted it, but CRA’s IC72-17R6 information circular still uses the older 25% language. For any current transaction, rely on the 2024 Fall Economic Statement plus the current edition of T2062.

4. Executor checklist (where a Canadian-resident child is the executor)

1. Obtain an ITN (Individual Tax Number) for the deceased non-resident parent — Form T1261;
2. Notify the CRA of the disposition (within 10 days);
3. File T2062 / T2062A to request the Section 116 Certificate of Compliance;
4. File the final T1 for the deceased (deadline: April 30 of the year following death, or 6 months after death, whichever is later);
5. Apply for probate in the province where the property is located — Ontario and BC charge probate fees on a sliding scale of estate value (BC ≈ 1.4%; Ontario ≈ 1.5%);
6. Coordinate inheritance notarization in Mainland China / Hong Kong, and complete the SAFE filing (国家外汇管理局备案) when converting and remitting funds out of China;
7. Before any distribution, obtain the final clearance certificate (TX19) from the CRA, otherwise the executor can be personally liable for unpaid taxes.

II. Scenario B — Non-Resident Parent Gifts Canadian Property to Canadian-Resident Child

Canadian tax law treats a “gift” as a “disposition at fair market value” — the non-resident parent still has a Canadian capital gain and still has to run Section 116 (35% / 50% withholding). At the same time:

• Once the Canadian-resident child receives the property, their adjusted cost base (ACB) = FMV at the time of the gift; future sale gains are computed off this stepped basis.
• For provincial foreign-buyer surtaxes: a true gift / inheritance (no consideration) is generally treated as “not a purchase” and exempt from Ontario NRST (25%) and the BC foreign buyer tax (20%), but supporting documents (the will, proof of family relationship) must be produced and the application made under each province’s specific land transfer tax exemption.

At the time of the gift (non-resident parent side):
  Deemed disposition at FMV → Canadian capital gain
  → Section 116 Certificate of Compliance (35% / 50% withhold)

At the time of the gift (Canadian-resident child side):
  ACB = FMV at the date of the gift (cost base reset)
  Future sale uses the new ACB

Land transfer tax layer:
  ✓ Ontario NRST 25% — true gifts can be exempt (item-by-item application)
  ✓ BC foreign buyer tax 20% — exemption under PTT Act §14 family transfer
  Required: will / proof of relationship / both parties' ID

III. Scenario C — Canadian-Resident Child Inherits Property in Mainland China or Hong Kong

1. Canadian side

• Canada does not tax “inheritance income” — receiving a foreign inheritance carries no income tax in itself.
• T1135 foreign property reporting: if the total cost of “specified foreign property” held at any time during the year exceeds CAD 100,000, the form must be filed.
  • Personal-use foreign property (e.g., the parents’ apartment used for family vacations) does not count as specified foreign property and is excluded from the threshold;
  • Rental foreign property → must be included, and rental income reported;
  • Inherited property’s ACB = FMV at the time of inheritance.
• Future sale of the foreign property: worldwide-income taxation applies — the gain is computed under Canadian capital-gains rules (one-half taxable inclusion), and tax already paid in the source country (China / Hong Kong) can be claimed as a Foreign Tax Credit (FTC).

Inheritance itself (Canadian side): no income tax ✅

T1135 foreign property reporting threshold:
  Specified foreign property cost > CAD $100,000 → must file
  ✓ Personal-use foreign property → NOT counted toward the threshold
  ✗ Rental foreign property → must be counted; rental income reported

Future sale:
  Canadian capital gain (50% inclusion rate)
  + Foreign Tax Credit (FTC) offsetting tax already paid in the source country
  ACB starting point = FMV at the time of inheritance

2. Mainland China side (always engage local PRC counsel / accountants)

• As of 2026, Mainland China has no estate tax or inheritance tax — historical drafts (2002) were never legislated.
• However, when the inherited property is later sold, the following may apply:
  • Individual Income Tax (IIT): typically 20% on transfer income (when an inherited property is sold, the original cost is the deceased’s original cost, so a large gain may result); a “满五唯一 (held five years and the only home)” residence is exempt;
  • Land Value-Added Tax (LVAT): generally exempt for individual residences;
  • Deed Tax (契税): heirs are usually exempt; gifts attract deed tax.
• 继承公证 (inheritance notarization): since 2016 it is no longer mandatory — the title can be transferred at the real estate registration centre directly, but 继承人均在场 (all heirs must be present) in person or by notarized power of attorney. Foreign-related inheritance in Beijing / Shanghai / Guangzhou / Shenzhen goes through the foreign-affairs section of designated notary offices, with waiting times running from several weeks to several months.

Typical Mainland China timeline (foreign-related inheritance):

Step 1  Gather the deceased's documents (household register / death
        certificate / property certificate)
Step 2  Canadian-resident child supplies: ID + proof of relationship +
        Hague Apostille / consular legalization
Step 3  Inheritance notarization (继承公证) at the local notary office
        in the city where the property sits (weeks to months)
Step 4  Title transfer at the real estate registration centre
Step 5  If sold later: report 20% IIT (cost base = deceased's original cost)
        + "满五唯一" exemption may apply; LVAT generally exempt for
        individual residences; deed tax exempt for heirs
Step 6  Foreign exchange remittance: SAFE filing (国家外汇管理局备案) /
        bank due diligence; the USD 50,000 / person / year quota
        does not cover this — a separate application is required

3. Hong Kong side

• Hong Kong abolished estate duty effective 11 February 2006 — for any decedent dying after that date, no estate duty is levied on Hong Kong assets.
• The actual burden lies more in the probate process and stamp duty (inheritance itself is stamp-duty-free, but if a re-mortgage / transfer is involved separate rules apply).

IV. Scenario D — Canadian Parent Dies, Canadian Property Goes to Non-Resident Child

1. The parent’s final year

The parent, as a Canadian resident, reports all capital gains in the final T1 under the deemed-disposition rule (no spousal rollover where the heir is not the spouse). The spousal rollover only applies where the spouse is a Canadian resident or where the asset goes into a Canadian-resident spousal trust — a non-resident spouse cannot use the rollover, except where the treaty specifically provides otherwise.

2. Once the estate reaches the non-resident child

• If the property is transferred directly to the non-resident child and continues to be rented out:
  • The payer of the rent (tenant or property manager) must withhold Part XIII at 25% of gross rent and remit monthly to the CRA;
  • By filing NR6 + a Section 216 election, the basis can switch to 25% withholding on net rent (after expenses), with a T1159 (Section 216 return) to be filed by June 30 of the following year.
  • The Canada-China treaty preserves source-country taxation in full for rent (income from immovable property) — the treaty does not bring 25% down. This differs from the treaty’s effect on dividends / interest.
• If the non-resident child later sells: Section 116 (35% / 50% withholding) is triggered again, plus a final non-resident T1.
• If the estate holds and then distributes cash: payments by the estate / trust to a non-resident beneficiary are deemed distributions under ITA s. 212(1)(c) and subject to Part XIII 25% withholding (subject to treaty adjustment: the Canada-China treaty’s “other income” article generally still leaves it at 25%).

If kept and rented out:
  Tenant / property manager → 25% Part XIII on gross rent, monthly to CRA
  ↓ File NR6 + Section 216 election:
    Switch to 25% withholding on net rent
    File T1159 by June 30 of the following year
  Note: Canada-China treaty preserves full source-country taxation on rent
        → Treaty does NOT bring 25% down (different from dividends / interest)

If the non-resident child later sells:
  Section 116 triggered again (35% / 50% withholding)
  + Final non-resident T1

If estate holds and then distributes cash:
  ITA s. 212(1)(c) deemed distribution
  → Part XIII 25% withholding (Canada-China "other income" still typically 25%)

3. Provincial foreign buyer taxes

Inheritance itself generally does not trigger Ontario NRST (25%) or the BC foreign buyer tax (20%) — both apply only to “purchases”. But once the non-resident child converts the inherited property to rental use or transacts further on it, the holding-phase provincial taxes — SVT / UHT — come into play.

V. Scenario E — Cross-Border Canada-US: Inheriting US Property / Canadian Decedent Holding US Property

1. US Federal Estate Tax — the 2026 critical change

• OBBBA has made the exemption permanent: from January 1, 2026, the US federal estate and gift tax lifetime exemption is USD 15M per person (USD 30M per couple), with inflation indexing from 2027.
• The TCJA’s “2026 sunset to about USD 7M” has been repealed — this is the single most important update relative to legacy cross-border planning materials.
• However, non-US-citizen, non-US-resident aliens (NRAs) still have only a USD 60,000 exemption — a Canadian-resident parent (not a US citizen / green-card holder) holding US-situs real estate at death (a Florida vacation home, etc.) is still on the hook for US estate tax.

From 2026-01-01 (OBBBA, permanent):
  US federal estate / gift tax lifetime exemption = USD $15,000,000 / person
  Couple = USD $30,000,000
  Inflation-indexed from 2027

TCJA "2026 sunset to ~USD 7M" → repealed by legislation ✅

But NRAs (non-US-citizen, non-US-resident aliens):
  → Exemption is still only USD $60,000
  → A Canadian-resident parent holding US real estate
     (Florida vacation home, etc.)
     still owes US estate tax filings and payments

2. Canada-US Treaty Article XXIX-B — the pro-rata unified credit for Canadian decedents

• The Canada-US treaty allows the estate of a Canadian-resident decedent to claim a share of the US unified credit calculated as (US-situs assets ÷ worldwide assets) × the unified credit available to a US citizen — meaning a Canadian resident effectively accesses a pro-rata slice of the US USD 15M exemption rather than being capped at USD 60,000.
• Small estate exemption (Para 8): where a Canadian resident’s worldwide gross estate at death is ≤ USD 1.2M, US estate tax is levied only on US-situs real estate or US permanent establishments — other US-situs assets (e.g., US stocks) can be exempt.
• The estate of a Canadian decedent must still file Form 706-NA (US Estate Tax Return for a non-resident) to claim the treaty benefit.

3. Income tax interaction when a Canadian-resident child inherits US property

• The US side gives a stepped-up basis — the child resets the US-side cost base to FMV at the parent’s death.
• Canadian side: ACB = FMV at the time of inheritance — broadly aligned with the US side, avoiding a one-off large gain.
• On sale, the US taxes US-situs real estate first (FIRPTA withholding); Canada then permits the same US tax to be credited under the Foreign Tax Credit (FTC).
• Holding-period reporting: T1135 + T1135 Part B (where there is rent).

US side: stepped-up basis
  → Child resets US-side cost base to FMV at parent's death

Canadian side: ACB = FMV at the time of inheritance
  → Aligned with the US side, avoiding a one-off large gain

On sale:
  US taxes the US-situs real estate first (FIRPTA withholding)
  Canada allows the same US tax via FTC

Holding period: T1135 + T1135 Part B (where there is rent)

4. Hong Kong / Mainland China direction (reminder)

• Hong Kong has no estate duty; cross-border friction is mainly probate, foreign exchange remittance, BCAN formalities;
• Mainland China has no estate tax, but sale-stage taxes are heavy and the inheritance procedure is complex.

VI. Provincial Buyer-Side & Holding Taxes That Interact with Non-Resident Transfers (2026 Status)

2026 key reminder: The two BC SVT bands move from 0.5% / 2% to 1% / 3%, making 2026 the most direct cost variable for families where a non-resident child holds inherited BC real estate. At the same time, the UHT is repealed from the 2025 tax year following Royal Assent of Bill C-15 on March 26, 2026, but late-filing penalties for the 2022–2024 years remain in force.

VII. Practical Executor Checklist for Canadian-Resident Children Handling a Non-Resident Parent’s Estate

1. First confirm the deceased’s tax residency status: did the parent meet the “factual resident” test (> 183 days / primary residential ties) in the past year? If they were ever deemed a Canadian resident, the rules switch to Scenario D.
2. Apply for the deceased’s ITN (T1261) — required for all non-resident filings where there is no SIN on file with the CRA.
3. Notify the CRA of the disposition (within 10 days) → file T2062 / T2062A for the Section 116 Certificate of Compliance (mind the 35% / 50% withholding window).
4. File the final T1 (deadline: April 30 of the year following death, or 6 months after death, whichever is later).
5. Apply for probate in the province where the property sits: Ontario ≈ 1.5% of estate value, BC ≈ 1.4%, Quebec notarial wills can avoid probate.
6. Coordinate with counsel on the China / Hong Kong side: 继承公证 (inheritance notarization), foreign exchange conversion, the disposition of the deceased’s estate in the Mainland.
7. Before distributing the estate, obtain the CRA’s final clearance certificate (TX19) to avoid personal liability of the executor.
8. Where the estate has non-resident beneficiaries → set up the Part XIII withholding mechanism; if there is rental income, pair with NR6 + Section 216.
9. Assess whether T1135 is triggered (Canadian-resident child holding overseas / Canadian financial account balances after the inheritance).
10. For the cross-border component (US property) → prepare both 706-NA + Article XXIX-B treaty documents.

VIII. Plain-Language Reminders for Clients

• “Canada has no estate tax” ≠ no tax at death. Deemed disposition + Section 116 + Part XIII together form a de facto “death tax chain”.
• Cross-border inheritance is not “go where it’s cheaper” — neither country’s exemption automatically applies in the other; the only relief is via treaty.
• 35% is the biggest 2025-2026 change — one band higher than the 25% in legacy materials. Cross-border families need to make cost basis, loan structures, and trust setups transparent and auditable while the parent is still alive.
• The 2026 good news comes in two parts: UHT repealed, and the US exemption permanent at USD 15M — but the bad news is BC SVT accelerating to 3%, with provincial holding taxes still tightening.
• The real pain point in Mainland inheritance is procedure, not tax — notarization + foreign exchange + the requirement for all heirs to be present in person is what consumes most of the time. Start 6–12 months in advance.