Canadian inherits US Estate - Cross Border

Happy Saturday!  Hope you enjoyed our brief lovely Spring days this week.
>
>Would you happen to know, 'off the top of your head' (what an odd expression),
>if funds inheritated by a beneficiary of an estate are taxable? (whether US or Canadian)
> 
>XXXXXXX claimed her portion and it was calculated that the taxes were almost half of the inherited amount.  Does this seem excessive?  This is Canadian tax. 
>
>Under (US) form W-8BEN entitled "Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding" we signed (through our attorney) and sent to AARP who released funds to us:
>As Canadians we are "...not subject to tax under an income tax treaty, and..." as such"...a foreign person exempt from backup withholding."
>So, in fact, we were/are exempt from US tax, but, as the question above asks, are we then required to pay Canadian taxes on this?
>
>In my personal simple-minded opinion is that this has been 'a gift' left for us and should not be taxed by any government!
>
>I really don't want this to preoccupy your much needed time off but any guidance or recommendations/suggestions from whom to seek further council would be appreciated
>i.e. Canadian Lawyer who may specialize in this arena. 
>
>Your response of 'I dunno' is also okay by me.
>
>
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david ingram (www.centa.com) replies:
This was sent to me by a client who had recieved it from a friend.  
Iis an almost impossible question to answer because I do not know of what the estate was composed.
However we look after a lot of situations where there is a cross border death (three of them right now) and it obviously triggered my interest.
Normally beneficiaries do not pay tax on whatever they receive from an estate.  Any tax is usually paid by the estate. An exception would be pensions, 401 accounts or IRA's.
In this case, I am assuming that the deceased left a 401(K) or IRA and that AARP (American Association of Retired Persons) was the plan administrator.
In this case, the beneficiaries are taxable on the funds received.  Canadians would pay tax to the USA first and Canada Second. If taken as a pension or annuity on an annual or monthly basis, the US would withhold 15% which would be paid to the US federal government and then the beneficiciary would report the gross (before tax deducted) on lines 115 and 433 of their CanadianTax return.  They would then report the tax paid to the US on line 431 and do the calculation to get a foreign tax credit agains their Canadian tax (Art XVIII of the US Canadian Tax treaty).  
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IF the Canadian Beneficiary takes it as a lump sum, the amount gets added to their gross income and if their income is already significant, the Canadian Tax could be as high as 44%.  If so, the Canadian should be sure to claim the foreign tax credit on lines 431 and 433 which they will find on Schedule 1 of the Canadian return.  The Canadian will also have to find the relative lines on the Provincial 428 schedule.
However, if the Canadian had inherited a $500,000 bond which was not part of a tax sheltered plan, there should be no Canadian tax period.  And if the Canadian inherited a $500,000 Palm Springs Condo, there would not be any Canadian Tax.  
Hope this helps.
david ingram
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