Is my US Inheritance taxable in Canada?

Question

Hi

I'll be receiving a sizable inheritance (non-registered investments) from a US relative in the next few months. My wife and I moved to Vancouver a few years ago from the US and are both dual citizens.

Will my inheritance be taxed in Canada when received?

Thanks for any information you can provide.

Sincerely

XXXXX

Answer

Hi XXXXX

Thanks for the email. Given I don't have the particulars of your situation I won't be able to give actual advice. That being said I will do my best to give you a general overview of the implications of receiving an inheritance from the US while in Canada.

First, let me give you a brief overview of both the Canadian and US tax system when it comes to estate taxes and inheritances. Unlike the US system Canada does not have an estate tax. Rather, for Canadian tax purposes when an individual dies (and their assets are not transferred to their spouse) their assets are "deemed to be disposed". Essential it's as if they sold their assets at the time of death and all accrued capital gains are realized.

US Citizens and Green Card holders are not subject to a "deemed disposition" on their assets, but rather they are subject to the US estate tax regime. Under US tax law US individuals that die are taxable on their worldwide estate in excess of the current US estate tax exemption. For 2023 the US estate exemption is just under $13M. Any estate over this exemption amount will be taxed at a rate of approximately 40%.

Now, on to your actual question...

If we assume that the US estate from which you are receiving the inheritance has filed a US estate tax return, and you will be receiving cash, you will not have to pay tax on any of the capital received from the estate in Canada or the US. That being said, any income or capital gains earned on the capital will be taxed in your hands going forward.

If you receive investments from the estate rather than cash your new cost basis in the assets will be the fair market value at the time of your relative's passing. Once again, you'll only be taxable on any capital gains or income from that point forward. The tracking for new ACB adjustments however can be quite burdensome.

Also note that when you start taking distributions from the US estate you may be required to file Canadian T1142 forms to report the taxable and non-taxable portions of the distribution.

And once the assets are in your hands, and to the extent that you hold investments in the US, or US based investments in your Canadian investment account, you may be required to file T1135 foreign reporting forms to Canada.

As with most things related to cross-border investments and taxation the answer to questions also depends on the individuals particular situation. Please book a complimentary cross-border investment consultation so we can further flush out your situation.

I look forward to speaking to you soon.

Chris