Do Canadians pay tax on an inheritance from the US?

Receiving the inheritance is not a taxable event for you

Canada taxes income, not windfalls. An inheritance is a capital receipt, there is no line on the T1 to report it, and no Canadian tax is triggered by the transfer itself, whether it arrives as a wire from a US estate account, a brokerage transfer or a deed to a house in Florida. The US side works differently but lands in the same place for you: the US estate tax is a tax on the deceased person's estate, calculated and paid by the executor before anything is distributed, and the heir is never the taxpayer. For a US citizen or US-domiciled person the exemption before any federal estate tax applies runs into the millions of US dollars as at the time of writing, so most estates pay nothing.

Two footnotes. A handful of US states levy an inheritance tax on the beneficiary rather than the estate — Pennsylvania is the best-known — and that tax follows the deceased person's state, not your address, so check where the estate is being administered. And your Canadian bank may ask for the estate paperwork before crediting a large incoming wire; that is an anti-money-laundering step, not a tax one, and the will and the executor's letter answer it.

Inherited IRAs and 401(k)s are taxed as you draw them down

A US retirement account is the exception to the tax-free arrival, because the money inside it was never taxed. When you, as a Canadian resident, take a distribution from an inherited IRA or 401(k), the amount is income on your T1 in the year received, converted to Canadian dollars. The US custodian withholds tax on the way out — the treaty rate for periodic payments is 15%, and lump sums are generally withheld at 30% — and you claim that US tax as a foreign tax credit against your Canadian tax on the same income, up to the Canadian tax it attracts. We walk through the mechanics in what happens to a 401(k) or IRA when I move to Canada.

US rules also set the pace. A beneficiary who is not the spouse must generally empty an inherited IRA within ten years of the death, so the income cannot be deferred indefinitely, and taking it all in one year usually pushes you into a higher Canadian bracket than spreading it. A surviving spouse may be able to move the account into an RRSP under a specific transfer rule; a child or other heir cannot, and the account is simply drawn down. Inherited Roth IRAs follow their own treatment and need a separate look. Our 401(k) and IRA to RRSP guide explains when a transfer is possible.

Inherited property and investments start with a new cost base and ongoing filings

For Canadian tax purposes you are treated as having acquired inherited property at its fair market value on the date of death, in Canadian dollars at that date. US law gives a similar step-up. From that point you own an ordinary US asset as a Canadian resident, and the usual cross-border rules apply to it:

• US stocks or a US brokerage account — dividends are withheld at 15% under a W-8BEN and credited on your T1; gains on sale are taxed in Canada with half the gain included in income. The shares also count as US-situs assets for your own eventual US estate exposure, which we cover in can Canadians owe US estate tax on US stocks.
• US real estate — rent is reported on a 1040-NR and on your T1; a sale triggers FIRPTA withholding and a US return, with the Canadian gain measured from the date-of-death value and a credit for the US tax. See do Canadians pay capital gains tax when selling US property.
• An interest in a US trust — if the will leaves assets in trust for you, distributions may be taxable and you file form T1142 to report distributions from a non-resident trust.

Then there is the T1135. Once the total cost of your specified foreign property — inherited US shares, brokerage accounts and rental property included, measured at the date-of-death value — exceeds C$100,000 at any time in the year, the Foreign Income Verification Statement is due with your T1. An inherited IRA or 401(k) is not itself reportable on the T1135, but the accounts and property outside it are. Our T1135 guide explains the form and the penalties for missing it.

A quick map of what is taxed, and when

How we handle US inheritances for Canadian clients

We start with the date-of-death valuations, because every later gain and every T1135 figure depends on them, and we ask the US executor for the statements while they are easy to obtain. From there we set up the reporting for each asset, plan inherited IRA withdrawals across the ten-year window to keep Canadian brackets down, and coordinate with the estate's US advisors so the 1040-NR, the T1 and any trust filings agree. This work is quoted as a fixed fee after a discovery call through our cross-border tax services.

Source: IRS — Estate Tax.