Am I taxed on my inheritance from the US?

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US investments moving up to Canada
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Each year I help over 500 clients file their Canadian and US tax returns as well as plan for both their Canadian and US investment accounts. I also regularly help new US clients plan for their move to Canada.

Feel free to reach out via email at phil@philhogan.com or by phone or text here 250-661-9417.




Question

Hi Phil

I found your website online after doing some research. Please let know the charge to answer my questions (do you accept paypal?)

I received an inheritance from my mother’s estate last month. It will take until 2021 to have the estate settled and for me to get my money.

My portion of the estate is made up of a regular investment account that will be transferred to fidelity investments, a US IRA account (with fidelity too) and a portion of the eventual selling price of my mom’s house.

The total of everything that is coming to me is just under $2 million dollars.

US investments moving up to Canada

I’m really not sure how all this works. The US accountant said that all the taxes will be paid to the US and that I won’t have any US tax to pay. He did say that I may have to pay US tax if I pulled money from the IRA.

Do I have to pay any inheritance or estate tax on this money in Canada? I’ve been looking online and can’t seem to get a clear answer.

I look forward to your reply.

Regards

XXXXXXX

Answer

Hi XXXXXX

Thanks for the email.

There’s quite a bit of stuff here to unpack, however I’ll give you some general guidance that should help. If you need more info let’s schedule a full consult.

Let’s first assume that all the individual and estate filings are properly done on the US side with respect to your Mother’s estate.

Are you taxed on your US inheritance?

No, you are not taxed directly on the inheritance you receive from the US. Any non-registered investments or cash that you receive will not be subject to any type of inheritance or estate tax to you.

Any withdrawals or payments from the IRA however will be taxed in your hand. Both in the US and Canada. That being said, you will get a credit for any US tax you pay on the IRA payments (15% for non-US citizens).

It also gets tricky and likely very expensive to maintain the US investment accounts within the US a Canadian resident (whether you’re a US citizen or not).

First, Fidelity likely does not have the ability to manage the account for Canadian residents. If they ask you to find a US address to put on the account that should be a huge “red flag”. Putting a US address on a US investment account is not legal if it’s done to help maintain the residency status of the account.

Second, if the funds remain in the US your T1135 reporting requirements will be significantly complex and expensive to prepare. You can read more about T1135 reporting for US investments here. To greatly simplify your T1135 reporting requirements it’s best to have the US investments moved up to Canada. We can discuss this in more detail on our call.

Third, you’ll want to ensure the IRA is not paid out so that you don’t pay tax unnecessarily in both Canada and the US. To the extent that you don’t need the money currently it should be maintained in the account and deferred from tax until such time as you need the funds. The IRA also should be moved to Canada to ensure the portfolio is managed from a Canadian-centric approach taking into account foreign currency considerations.

I hope the info above has been helpful. There’s likely a lot more to discuss with respect to the accounts given cost basis for both Canadian and US purposes need to be calculated and maintained. Another reason why the funds should be managed from Canada for proper tracking.

Please give me a call at 250-661-9417 and we can chat about options.

Cheers

Phil

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