Inheritance - overseas - Foreign Tax

Sent: Saturday, December 02, 2006 10:38 AM
To: taxman at centa.com
Subject: Inheritance - overseas
Hi David - my question is Canadian-specific.
Are funds from sale of an asset inherited from
(parents) a country overseas taxable? Is there a
reporting requirement and if so, is there a threshold?
Does it make a difference if there is a tax treaty
between the two countries or not?
Thanks
xxxxxxx
-------------------------------
Any principal inherited is NOT taxable to you on your Canadian Income Tax
return unless it is coming from a term certain annuity or pension like TIAA
or CREF in the United States in which case it might be governed by a treaty.
For instance, any pension received from the US is taxed at 15% (Article
XVIII of the treaty) in the US and then at your marginal Tax bracket in
Canada.
You would add the pension to lines 115 and 433 of your Canadian return and
claim credit for the tax paid to the US on line 431 on schedule 1.
If your share of the estate earned any interest or dividends or rents from
the date of death until you received the money, those amounts are also taxed
in Canada and likely taxed in the country you received them from first at 10
or 15% for interest and dividends and the going rate for rents.
Again, these figures would go on line 121 or 126 of your Canadian I1 (and
the relevant lines of your TP1) if you live in Quebec.
If you had rents in the estate, the gross would go on line 162, the net on
line 126 and the tax on line 431.
If you had capital gains as part of the estate, one half of the profit would
go on line 127 and "one half" of the foreign tax on line 431.
This last is a miscarriage of justice.  Canada has taken the stand that
since they are only taxing one half of the profit, you can only use one half
of the foreign tax credit paid which is a totally ridiculous position to
take.  For instance, the US has a maximum tax rate of 15% on capital gains
even if the person's tax rate is 33%.  The US used to tax one half of
capital gains at standard rates as we do but changed the system.  Since
Canada copied the US system originally in 1972, Canada should allow the full
US tax paid.  Write your Member of Parliament.
Hope this helps.
--------------------------------------
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