Ontario Resident Inheriting From a US Estate: Tax and Reporting

You live in Ontario and have learned that someone left you money or property in the United States. Two countries are now involved, and it is not obvious which tax rules apply to you or who you should be dealing with.

This article covers the Canadian side that tends to matter most to a beneficiary: tax treatment of an inheritance, foreign property reporting and the treaty. The US side is governed by US law, so a US lawyer is usually needed for that part.

Two legal systems, two sets of rules

A US estate is generally administered under US rules by the person in charge of it there. Ontario law does not control that process, and this article does not explain it. What Ontario and federal Canadian law do govern is how you, as a Canadian resident, report and are taxed on what you receive.

Early on, it helps to ask the US representative three questions: what the estate holds, whether any US estate tax is expected, and when distributions are likely.

US estate tax and the Canada–US treaty

US estate tax exemption amounts and rates are set by US law and change, so they need to be confirmed with US advisers rather than assumed. What can be said from the Canadian side is that Article XXIX B of the Canada–United States Tax Convention lets US estate tax paid on US-situs property reduce Canadian tax for a Canadian-resident decedent. The estate of a non-citizen non-resident also gets a pro-rated US unified credit.

In plain terms, the treaty is meant to reduce double taxation on the same property. Whether it helps depends on where the deceased lived, what they owned and where it was located.

Canadian tax on what you receive

For the person who receives them, the CRA lists most gifts and inheritances as amounts that are not reported or taxed. That is the starting point for a beneficiary in Ontario.

If the deceased was a Canadian resident, capital property is treated as disposed of immediately before death at fair market value, with any gain or loss reported on the final return, and a later sale by the beneficiary is measured against that value. If the deceased lived in the United States, the Canadian treatment of what you later sell may differ, so confirm it with an accountant before you sell. Income that inherited money or property earns after you receive it is also worth discussing with an accountant.

Reporting foreign property you inherit

A Canadian resident whose specified foreign property costs more than $100,000 in total at any time in the year must file Form T1135. For property received as an inheritance, the cost amount is its fair market value at the time of the inheritance. Keeping a record of the value on the date you inherit is therefore useful.

Whether a particular asset is specified foreign property, and how the $100,000 total is counted, is worth confirming with an accountant.

Receiving the funds and what to do next

How and when funds reach you depends on the US representative, the institutions holding the assets and US requirements, which a US lawyer can explain. Be wary of anyone who contacts you offering to speed things up for money. Ontario's official guidance warns people to beware of upfront fees, and being asked to pay a fee to release an inheritance is a warning sign of fraud.

• Get the name and contact details of the US personal representative and their lawyer, and verify them independently.
• Ask for a list of assets, with values on the date of death.
• Ask whether US estate tax is expected and whether it has been paid.
• Keep records of the value of anything you receive on the date you inherit it.
• Speak with a Canadian accountant about Form T1135 and any tax treatment of foreign property.
• Speak with a US lawyer about the US side, and an Ontario lawyer if the deceased also had Ontario ties.
• Never pay a fee to have an inheritance released.

Frequently asked questions