Canadian Resident Inheriting From a US Estate: What to Expect

Being named in the will of someone who died in the United States can feel confusing. You may be dealing with a foreign court process, an unfamiliar estate representative and a currency exchange, all while living in Ontario. It helps to separate the US side of the estate from your own Canadian obligations.

This article focuses on what happens in Canada once you receive an inheritance from abroad, and the questions to raise on the US side. US rules are outside Ontario law, so expect to need cross-border advice for anything that depends on them.

Two separate systems: the US estate and your Canadian tax

How the US estate is administered, whether a US estate tax return is needed, and when you can be paid all depend on the situation. Those are questions for the estate's US lawyer or representative.

Separately, as an Ontario resident, you have your own Canadian reporting. The two systems interact, because a US filing or treaty credit may affect the overall cost of the estate, but each has its own forms and deadlines. Ask the estate's representative which US filings are being made and whether anything is expected of you personally.

Is an inheritance taxable in Canada?

The Canada Revenue Agency's list of amounts that are not reported or taxed includes most gifts and inheritances. So receiving the inheritance is generally not income that you report on your return. Income earned on those amounts afterward, such as interest, dividends or rent, is taxable.

This is a general rule, and the details depend on what you receive. A cash bequest, a share of a brokerage account, a retirement account and a house can each be treated differently. Retirement plans in particular can carry tax consequences that are not the same as an ordinary gift, so ask the estate for a breakdown of exactly what you are receiving and speak with an accountant who understands both countries.

Foreign property reporting: Form T1135

Once you own assets outside Canada, you may have an annual reporting duty even though the inheritance itself was not taxed. Form T1135 is required if a Canadian resident held specified foreign property costing more than $100,000 at any time in the year. For property received by gift, bequest or inheritance, the cost amount is its fair market value on the date you received it.

If you inherit a US bank account, brokerage account or shares and later leave them there, you may need to file this form each year. Whether moving the money to Canada changes your reporting depends on your situation, and converting and transferring has its own cost and timing issues, so plan it with an accountant.

Practical issues unique to a foreign estate

• Currency: the amount you receive in Canadian dollars depends on the exchange rate, so keep records of the date and value of each payment.
• Records: keep statements showing the value of any asset on the date you received it, because that value is the starting point for the T1135 cost.
• Time: foreign estates can take longer to close, and you may not be paid until the US process allows.
• Documents: you may be asked to sign releases, receipts or tax forms. Read them, and do not sign until you understand what you are agreeing to.
• Real property: if you inherit US land or a home, ask separately about local taxes, insurance and how a later sale would be reported in Canada. A property used primarily as your residence is treated differently from an investment.

US estate tax, any treaty relief between Canada and the United States, and any US transfer paperwork depend on the size and nature of the estate and are best confirmed with a cross-border lawyer or accountant before you rely on them.

What to do next

• Ask the US estate representative for a written list of what you are receiving, with values on the date of death
• Ask which US forms are being filed and whether they affect your share
• Keep records of the date and fair market value of everything you receive
• Tell your accountant early so foreign reporting is planned, not discovered at filing time
• Check whether the total cost of any foreign property is above $100,000
• Get advice on income tax on any earnings, since income earned on inherited amounts is taxable
• Be cautious of unsolicited letters offering to locate or release an inheritance for a fee, and verify the sender before sharing information

Frequently asked questions