US Inheritance from Father to US citizen - Canadian resident -


QUESTION:
I am a US citizen working in Toronto area for the next few years. My father (US citizen in NJ) recently died and I will be receiving a sizable cash distribution ($100K usd+/-).
Is there any reason to be concerned about being taxed either by the US or CA or is this money free from taxes?
If necessary I could postpone the distribution until I return or have the money deposited into my US bank account but my mutual fund company will not accept the money into my retirement IRA while I am in CA.
Is there another option for putting this money to work for me until I return to the states?

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david ingram replies: - I pulled this out of the rejected file because I was watching the Republican convention and wandering through them.
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As a Canadian resident, you are taxable on your world income no matter where it is and no matter what method you use to hold the money unless you have an ACTIVE foreign corporation with FIVE full time employees who are NOT RELATED TO YOU.

In the case of the ACTIVE corporation, you are still taxable on any monies paid or credited to your account but it is considered a foreign corporation and the internal earnings are not taxable to you.

And, if your Foreign holdings exceed $100,000 Canadian, you must also file form 1135 or face $25.00 a day penalties to a maximum of $2,500 for failure to file the form.  If the money has not being reported, the penalties can be muuuuucccchhh larger/

US CITIZEN 'anywhere'

On the other hand, as a US citizen, you are also taxable on your world income no matter where it is and no matter how it is held.  In the case of a foreign corporation, the rule is that you must report your share of internal earnings whether paid to you or not when your share of the company is 10% or more with three different levels of reporting.  failure to report ANNUALLY on US form 5471 is a penalty of $10,000 for the first 90 days and $10,000 MORE each 30 days thereafter to a maximum of $50,000.

You should go to www.centa.com and read the Oct 95 newsletter which details the responsibilities of a US citizen out of the country,.

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Back to your question.

The inheritance itself is not taxable to you in either country with a possible exception. 

Sometimes, you will be the recipient of the last ten years of a pension or an annuity an din this case you will be taxable on the monthly  payments from the pension.  In this case, under the  rules of the US Canada  Income Tax Convention (treaty) you will only pay the US 15% tax on the pension or annuity under ARTICLES XVIII and XXIV.

However, if you receive $5,000,000 in the Bank of America, your father's estate would have paid any tax before you received it.

And I am worried about your statement about leaving the money in the US as if that would make the money non-taxable in Canada.  It just does not work that way. 

Putting the US income on a US return and the Canadian income on a Canadian return and not have the other country's income on one of the other returns so that you have reported world income to the country in which you are a resident is a criminal offense if the IRS or CRA want to prosecute.

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these older questions might help as well  for ideas.
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My_question_is: Applicable to both US and Canada
Subject:        Taxation of capital gains and inheritance
Expert:         taxman@centa.com
Date:           Wednesday December 26, 2007
Time:           08:09 PM -0000

QUESTION:

I'm contemplating a move from the US to Canada with my company.  Can you tell me if the capital gain on the sale of my U.S. primary residence and pending inheritances might be taxable in Canada?


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david ingram replies

When you arrive in Canada, your assets are all valued as of the day you arrived.

Any taxable gain or loss is calculated from that date.

If you sell the house and items in the inheritance before you come, there is no tax.

If you come and live in Canada for five years (IN A RENTED PROPERTY) or less and rent out or leave the family home empty, there would not be any tax on the US house payable to Canada if you filed a section 45(2) election to claim the home as your family home even though you did not  live in it.  However, if you did that for more than three years, it could come up as taxable in the US because you have to have physically lived in it for 24 out of the last 60 month period.
If the inheritance was compose d of stocks, you can have an interesting situation since each stock, security, mutual fund, limited partnership, bond, etc is valued separately as you come across the order.  If there are only ten stocks it is no big deal.  If you have 200, it is an accounting nightmare, especially if you sell off part of a holding.

A simple example would be:

You arrive on July 31 with three stocks you owned for a period of time.

Coincidently, you paid exactly $10,000 for each stock and there are 1,000 each so you paid $10.00 a share for 3,000 shares or $30,000 US.

The first complication could be different exchange rates at the time you bought them which would apply to anything you buy when a resident of Canada but in this case, we are only concerned with the exchange rate the day you came to Canada and for this purpose, I will ignore exchange.

So you arrive on Jan 31, 2008  and the day you arrive:

Stock A (you paid $10,000) is worth $5,000

Stock B is still worth exactly $10,000, and

Stock C is worth $30,000 making it all worth while.

Then a year later on Jan 31, 2009 you sell Stock A for $10,000.  For Canadian purposes, you owe tax on $5,000 because it was only worth $5,000 when you moved to Canada

Then a year later on Jan 31 2010 you sell B fro $15,000 and owe Canada tax on the $5,000 profit.

Then on Jan 31, 2011, you sell Stock C for $15,000 and have lost $15,000 because it was worth $30,000 when you came to Canada.  You then get to carry $5,000 of the loss back to 2009 and $5,000 back to 2010 and carry the other $5,000 loss forward against future profits.


You should go to www.centa.com and read:

1.   The US / Canada Income Tax section in the second box down on the right hand side.

2.   The October 1995 newsletter in the top left hand box.

This older Q & A might help as well.

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gillian@centa.com: Please see bottom of message if you wish to unsubscribe.
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My question is: Applicable to both US and Canada

QUESTION: Hello Mr Ingram,
   I'm an American citizen who has recently received approval for immigration to Canada.  Unfortunately, my mother died in July, and I'm now in the process of settling her estate.  She left me her house (and also, funds in her portfolio, which include annuities, an IRA, and mutual funds).  Do I have to sell the house prior to arriving in Canada (I must arrive in Canada by May, 2008) in order to avoid
Canadian taxes on the home? (Since you are confining these questions to real-estate matters, I'll be happy to get any advice here...However, for the record, my accountant and advisors in the U.S. have also told me it would be best for me to take the annuity distributions over a five-year period, in order to minimize US taxes).  Naturally, I'm concerned about Canadian taxes, as I must appear in Canada no later than May, 2008 in order to set the wheels in motion for Canadian immigration.

It is highly unlikely that I will be able to sell the house before my arrival in Canada, (Also, if each year I receive distributions from the annuities during the next five years, the possibility that I may be liable for Canadian taxes on these distributions if I reside in Canada over the next five years is also a great concern).  Do you think it would be best to liquidate all the assets now, even if it means paying additional US taxes?  Also, if I simply appear in Canada for a week or two in May, and then return to the US (with the expressed intention of returning to Canada later on in 2008), does that mean that I can be considered a Canadian resident, and thus liable for taxes from all the proceeds of the estate?  Am I actually considered a resident from the minute I land in Canada, subject to taxes on worldwide income?  I doubt that I can liquidate all the assets of the estate before my arrival in May, so this is naturally a major concern.  As I'm planning to


 move to Victoria, I
 would be looking forward to working with your firm in the future, provided, of course that I'm not going to be taxed to death!  Your answers here would be most appreciated.
    Thank you so much,
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david ingram replies:

This question came from www.jurock.com, the best real estate site in Canada and likely North America if not the world.

Your immigration to Canada does NOT make you taxable in Canada until you actually move here. 

If you come to Canada and get your PR (permanent resident) card and then return to the US, you will not be taxable in Canada on US income until you actually move here.

This is because of Article IV of the US / Canada Income Tax Treaty which will only tax you in the US on US income if that is where your home is and that is where you are for more than 183 days and that is your citizenship.

To maintain your PR card, you have to be physically present in Canada for 24 out of the 60 months after you get the card. 

If you were to spend 5 months a year in Canada and 7 months in the US for the next ten years, and did not have a Home available to you  in Canada on a year round basis, you would keep your PR card alive and Canada would NOT have the right to tax you on any of your US income.  If you worked in Canada for the five months you were here, or had investments in Canada, Canada would have the right to tax that money first and then you would report it to the US again and have to pay tax to the US.  However, any tax paid to Canada would be a foreign tax credit on US form 1116.  It would not be double taxation.

As soon as you stay in Canada for more than 183 days in a year, Canada has the right to tax you on your world income.  However, Canada would give you credit for any tax social security and Medicare  you paid to the US federal and or state governments. 

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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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