U.S. Inheritances – Taxable or Not?

When is the inheritance from your U.S. based parents taxable and in which country?

When you inherit property from a decendent, you generally inherit it at the fair market value on the date of death, which means that you only pay tax on the appreciation of the property after it is actually sold. A common statement made by many people is that inheritances are taxed in the U.S. but not in Canada and this is not entirely true.

Case Study

Cynthia is a Canadian citizen and resident. Cynthia’s grandmother, who is a U.S. citizen and resident, is very ill and expected to pass away shortly. Cynthia is a named beneficiary of her grandmother’s estate but she is also a direct beneficiary of her grandmother’s IRA (Individual Retirement Account).

Her grandmother’s estate has a value of approximately $4,350,000, including her IRA of $125,000; however, she understands that the IRA is to be paid directly to her instead of being paid to the estate first and then to her once any estate taxes are paid.

Cynthia’s mother, a dual citizen of Canada and the U.S., is the named beneficiary on Cynthia’s grandmother’s condo in Arizona; it has a current value of $235,000.

Questions and Answers:

Will Cynthia be taxed on the receipt of her grandmother’s IRA? Can anything be done to change this and is this something that should be changed?

Yes, Cynthia will be taxed on the IRA both in Canada and the U.S. because it is considered income from a decedent and not just a simple receipt of cash. If the income was first designated to flow through the estate and any residual after tax cash paid out to Cynthia then she would not be subject to tax on the amount received.

Will Cynthia’s mother be taxed on the receipt of the U.S. condo?

No, gifts of property are not taxable to the recipient.

Will Cynthia’s grandmother’s estate be taxable if she died today?

No, because the 2014 estate tax exemption is currently $5,340,000 and her estate is under that value.

To learn more about U.S. inheritances, pick up a copy of Canadians & The IRS, by Angela Preteau – available in the Knowledge Bureau bookstore.

Excerpted from Canadians & The IRS. © Knowledge Bureau, Inc. All rights reserved.