tax on inheritance from received by US citizen living in -

Hi David,

Thanks for doing my Canada and US tax returns this year -- it was a great relief for me to have it taken care of by someone who clearly cares about knowing and understanding all the details about tax law and procedures.
 
Anyway, I have a situation that I hope you will provide some answers on. As a reminder, my wife and I are both dual US-Canadian citizens, and we have been living in the Vancouver area since last year. It appears that I should receive a substantial inheritance of about $100,000 (Canadian source) sometime in the coming months. So, will this be part of my worldly income and be subject to taxation by the IRS (USA)? Is it taxable in Canada? Is there any special taxation rule for inheritance income? If I am going to be taxed on it, is there anything I can do in advance or after I get the funds to reduce the tax owed? 
 
Thanks very much.
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david ingram replies:

There is no Canadian tax on the inheritance because the tax is paid first by the estate.

However, if interest or dividends or rents or capital gains are earned by the estate before it is dispersed to you, you will owe tax on those amounts to both countries.

There is no US tax on the inheritance either.  BUT and it is a big BUT, if you receive over $200,000 you must file US form 3520.

The answer would be the same if you were living in the US but this other reply will add to it.


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QUESTION:

My wife and I are both Canadian in the last step of taking on
us citizenship. We but have fathers left in Canada that are
older and would inherit real estate and money. What are the
tax implications cross border. Is our citizenship going to
change the tax implications. Is there anything we can do to
minimize taxes?
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david ingram replies:

Your fathers final returns will determine the Canadian capital gains tax or tax on RRIF accounts, etc.  There would not be any tax on pure cash deposits.  If there was an estate with multiple heirs, then the estate would likely pay tax on any internal earnings until dispersed although the executors could elect to disperse internal earnings to the heirs until settlement.  If the executor did decide to disperse internal earnings by way of a T3 Canadian estate return, the executor would have to withhold 10% tax on any interest, 15% tax on any dividends and 25% tax on any rentals and sale of real estate.

After the final settlement, any capital dispersed to you would be tax free in Canada and the US.

Your new citizenship will not change the eventual taxation.  Your residence outside of Canada generates the withholding tax rules above.

You would report the income from the inheritance on forms D, B and E depending on the type and claim credit for the taxes paid to Canada on US form 1116.

However, you do need to file forms 3520 if the amount received is over $200,000 and have to fill in forms TDF 90-22.1 if you had a Canadian (or any other country's) financial account or accounts with more than $10,000 (cumulatively) for even a couple of hours.




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This is not intended to be definitive but in general I am quoting $900 to $3,000 for a dual country tax return.

$900 would be one T4 slip one W2 slip one or two interest slips and you lived in one country only (but were filing both countries) - no self employment or rentals or capital gains - you did not move into or out of the country in this year.
 
$1,200 would be the same with one rental
 
$1,300 would be the same with one business no rental
 
$1,300 would be the minimum with a move in or out of the country. These are complicated because of the back and forth foreign tax credits. - The IRS says a foreign tax credit takes 1 hour and 53 minutes.
 
$1,600 would be the minimum with a rental or two in the country you do not live in or a rental and a business and foreign tax credits  no move in or out

$1,700 would be for two people with income from two countries

$3,000 would be all of the above and you moved in and out of the country.
 
This is just a guideline for US / Canadian returns
 
We will still prepare Canadian only (lives in Canada, no US connection period) with two or three slips and no capital gains, etc. for $200.00 up. However, if you have a stack of 1099, or T3 or T4A or T5 or K1 reporting forms, expect to pay an average of $10.00 each with up to $50.00 for a K1 or T5013 or T5008 or T101 --- Income trusts with amounts in box 42 are an even larger problem and will be more expensive. - i.e. 20 information slips will be at least $350.00
 
With a Rental for $400, two or three rentals for $550 to $700 (i.e. $150 per rental) First year Rental - plus $250.
 
A Business for $400 - Rental and business likely $550 to $700
 
And an American only (lives in the US with no Canadian income or filing period) with about the same things in the same range with a little bit more if there is a state return.
 
Moving in or out of the country or part year earnings in the US will ALWAYS be $900 and up.
 
TDF 90-22.1 forms are $50 for the first and $25.00 each after that when part of a tax return.
 
8891 forms are generally $50.00 to $100.00 each.
 
18 RRSPs would be $900.00 - (maybe amalgamate a couple)
 
Capital gains *sales)  are likely $50.00 for the first and $20.00 each after that.

Catch - up returns for the US where we use the Canadian return as a guide for seven years at a time will be from $150 to $600.00 per year depending upon numbers of bank accounts, RRSP's, existence of rental houses, self employment, etc. Note that these returns tend to be informational rather than taxable.  In fact, if there are children involved, we usually get refunds of $1,000 per child per year for 3 years.  We have done several catch-ups where the client has received as much as $6,000 back for an $1,800 bill and one recently with 6 children is resulting in over $12,000 refund. 

Email and Faxed information is convenient for the sender but very time consuming and hard to keep track of when they come in multiple files.  As of May 1, 2008, we will charge or be charging a surcharge for information that comes in more than two files.  It can take us a valuable hour or more  to try and put together the file when someone sends 10 emails or 15 attachments, etc. We had one return with over 50 faxes and emails for instance. 

This is a guideline not etched in stone.  If you do your own TDF-90 forms, it is to your advantage. However, if we put them in the first year, the computer carries them forward beautifully.
 






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