Tax on foreign inheritance Canada

Allan Madan, CA
 Jan 14, 2014
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Do Canadians pay tax on an inheritance from abroad, overseas, our outside of Canada? This article will answer this question in detail, and provide a summary of inheritance tax in Canada.

Estate of Deceased Person outside Canada

When a person dies an estate, which is a type of trust, is automatically formed. The estate owns the assets of the deceased person. Over time, these assets are distributed to the beneficiaries of the estate, as per the instructions contained in the will of the deceased person.

In order to learn about the taxation of foreign inheritances received by Canadians, you must first understand the tax treatment of trusts as discussed below.

Inheritance Tax in Canada

Canadian Taxation of Foreign Estates (Trusts)

In many instances, the estate of a deceased person earns and accumulates income from property before the property of the trust is actually paid or distributed to family members of the deceased. How is this income taxed? Well, the taxation of foreign trusts / estates in Canada is based on the residency of the trust:

  • Resident trusts will be subject to Canadian income tax on worldwide income.
  • Non-resident trusts (NRTs) are not taxable in Canada.

However, under Section 94(3) of the Canadian Income Tax Act, NRTs may be deemed to be resident in Canada under certain circumstances. This is very important, because a NRT (or foreign estate) that is deemed to be a resident of Canada must pay Canadian income tax on its worldwide income.

Recently, the Supreme Court of Canada held that a trust is resident where the central management and control of the trust takes place. This is generally determined based on the location of the trust’s executors and/or the legal representative in charge of making decisions on behalf of the executors. [Executors of a trust are often family members who are responsible for disbursing the estate’s assets in accordance with the will of the deceased person.]

A foreign estate will be considered a NRT for Canadian tax purposes if:

  • The majority of the executors are located outside Canada or
  • If the lawyer responsible for managing the estate is abroad.

If one of the above two scenarios apply to a foreign estate, then the estate will not be subject to Canadian income tax on its earnings.

The following documents should be reviewed to assess the residency status of an estate:

  1. Letter of administration to identify executors of the Estate,
  2. Locations of the executors and/or decision makers of the Estate,
  3. Any other documents that clarify the residency of the Estate.

An estate tax accountant should be always consulted to determine if the foreign estate of your deceased relative is taxable in Canada.

Tax on Foreign Inheritance in Canada

Tax on Foreign Inheritance in Canada

 How the trust distributions (i.e. inheritance from the foreign estate) are taxed in Canada depends on whether the income earned by the estate is taxed at the trust level or in the hands of the beneficiaries (who are usually the family of the deceased person).

  If the estate’s income is taxed at the trust level, then the foreign inheritance received by Canadian relatives of the deceased person will not be taxable in Canada. On the other hand, if the estate’s income ‘flows through’ the  estate  and is taxed in the hands of the beneficiaries, then the Canadian family members of the deceased person  will pay  Canadian tax on the foreign inheritance received.

 In most cases, the foreign estate of the deceased person is responsible for paying taxes to the foreign country where the foreign estate is located. For example, a Nigerian estate pays tax in Nigeria, so the Canadian family members of the Nigerian estate will not pay inheritance tax in Canada.

To determine whether a foreign estate paid tax in the foreign country, your estate tax accountant should review any trust returns, trust deeds, official executors’ resolutions and the will of the deceased person.

Reporting to Canada Revenue Agency of Foreign Inheritance

Below, I discuss the reporting requirements in Canada of a foreign inheritance.

Foreign Inheritance Received over $10,000

Your financial institution will be required to report to the Canada Revenue Agency (CRA) any foreign fund transfers of $10,000 or more. The CRA may require additional information regarding the source of the monies and how it was earned. In this event, you may have to provide the necessary documents to support the non-residency status of the estate and the tax treatment of estate distributions.

If the distributions from the estate are not taxable in Canada (for the reasons discussed above), then the distributions from the estate do not have to be reported on your T1 personal tax return.

Foreign Income Verification Statement

Since you did not pay anything to become a beneficiary of the foreign estate of your deceased relative, you will not be required to file form T1135, Foreign Income Verification Statement, in respect of your foreign inheritance.

Instead, you will have to file Form T1142 – Information Return in Respect of Distributions from and Indebtedness to a Non-Resident Trust, to report any distributions (i.e. inheritance) received from the foreign estate of your deceased relative. Form T1142 has to be filed when you ultimately receive distributions from the trust. If you receive the foreign inheritance in 2014, you will have to file Form T1142 by April 30, 2015 (when your 2014 personal tax return is due).

Failure to file Form T1142 can result in penalties of up to $2,500 per year.

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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Comments 55

  1. Hello Allan

    I am chakib Najm,livig in ottawa , 613 2607930 h or 613 7959114 , canadian citizen , lebanese origine. I would like to meet with you to discuss big valuable inheritance from Lebanon , nothing in my name yet there but is going to be very soon !

    Taxes matter
    transfer of money
    etc…
    Thank you

  2. That has helped me quite a bit in understanding a foreign inheritance, BUT if i leave the inheritance of 124,000.00 dollars in the US bank and just let it accumulate interest, do i pay taxes on the annual interest?

  3. Canadian citizen inherited real estate with 5 sisters.Just sold house and received my share of $38k cad.Will I be taxed on that? Can I avoid paying tax by transferring money to a RRSP?

    regards Deborah

  4. Hi Allan,
    I have inheritance from the Philippines ( 50% of house and lot ) and I am planning to sell my share to the other recepient of the inheritance. Will there be a tax from the sale proceeds?

  5. Hi Allan
    I have an uncle who lives abroad who is going to send me a gift of the sum of $70,000. I live in Ontario , and have my own annual income of approximately $100,000. Do I have to pay taxes on this gift money?

  6. Hi Philip,
    There will be a capital gain (or loss) for Canadian tax purposes on the sale of the property to the beneficiary. The gain or loss is computed as the difference between the selling price (less selling costs) and the market value of the property on the date you inherited it.

  7. Hi Deborah,
    No, you will not have to pay tax on the amount received. In Canada, the Canadian beneficiary receiving a foreign inheritance does not pay tax on the inheritance received.

  8. Hi Allan I am a Canadian citizen . My dad is still alive and he is considering to send some money as a gift for me to establish my own business . It is near 120000 dollars . Do i have to pay tax on it and which document has to be accompanied with that since this money has to come from Iran .

  9. Hi Mitra,
    Gifts are not taxable to the recipient in Canada. Prepare a gift letter that discloses:
    * Date of gift
    * Amount of gift
    * Name of person giving gift (signature required)
    * Name of person giving gift (signature required)

  10. Hi Allan,

    I am a Canadian Citizen. I recently received inheritance from China (from my grandparents) of a house. How does the proceed work? Would I have to report this to Canadian government and how are the tax implications if I:
    1) Decide to sell the house in China immediately, and bring the proceeds over to Canada.
    2) Decide to not sell the house for now, and maybe sell it at a later date

    Thank you.
    Shawn

  11. Hi Shawn,

    Foreign inheritances received by Canadian residents are not taxable to the recipients. If you receive an inheritance of a house in China, you will not pay Canadian income taxes on the value of the house. However, you must get the house appraised. The cost of the house for Canadian tax purposes is equal to the appraised value on the date of inheritance.

    If you sell the house immediately, there will not be a capital gain or loss to report. If you sell the house later, then you could have a capital gain if the house is sold for more than its appraised value on the date of inheritance. Half of the capital gain is included in your personal income.

    Depending on the appraised value of the house on the date of inheritance, you may have to complete form T1135, foreign income verification statement.

  12. I inherited an incomplete apartment in Malaysia from my mother who passed away in 1993. However the builders went bankrupt during the 1997 financial crises the apartment building stood not completed. The government of Malaysia completed the apartment in 2008 and the apartment ise still not in my name yet due to other controversies, the trusties died without doing their job and the new builders went broke too . The builder is willing to direct transfer the apartment to a new buyer if I sell the apartment. Will I have to pay capital gains in Canada if I sell the apartment

  13. Hi Shadaan,
    You will have to report a capital gain on your Canadian tax return, half of which is taxable. The gain is equal to the difference between the market value of the property on the date of inheritance (in CDN dollars) less the sales proceeds in CDN dollars. Selling costs can be deducted from the sales proceeds in calculating the gain.

  14. Hi Allan,

    As a Canadian citizenship I have a $450,000 from the UK coming over. If I place it in my bank account will I have to declare it?
    Also, if I immediately withdraw it to pay off my mortgage and purchase another property, will I get taxed on it and/or have to declare it?

    Many thanks,
    Mark.

  15. Hi Mark,
    So long as you accumulated the funds while you were a nonresident of Canada, you can bring them to Canada without having to pay tax.

  16. If I received a money inheritance from a grandmother who is now living in Canada (as am I) but the money is in the United States do I pay tax on this inheritance?

  17. Hi Allan,

    My sister and I are planning to sell our property in the Philippines that our parents have gave us about 20 years ago. Roughly we will each get a share of $23,000 Canadian dollars. Do we get taxed for that? and do we have to report it to Canada Revenue

  18. Hi Aimee,

    You will need to report a capital gain on the sale of the property in the Philippines for your share. To determine the capital gain, first calculate the adjusted cost basis of the property {ACB}. The ACB is equal to the market value (expressed in Canadian dollars) of the property at the time of inheritance. Then calculate the proceeds from the sale converted into Canadian dollars using the exchange rate at the time of sale. The difference between the proceeds and the ACB is the capital gain. Only 1/2 of the capital gain is taxable to you.

  19. Hey allan,
    Im going to be inheriting/getting money from my grandma soon. In sum of $200,000. She is a indian citizen and i am born and raised in canada. How do i bring the money here and will i get taxed? What forms do i fill out and what is best way to get the money here. Please reply asap. Thank you so much

  20. Hi Allan,
    Dual citizen of US and Canada. Mother passed away in 2104, I am the executor of the estate. I received her house which was in her trust and will and the house was put into my name in Jan of 2015. I also some cash which was POD in her bank accounts to me, two other siblings received bonds etc. I sold the house on Dec. 31, 2105. The house was valued at $160, 000 (per comparable house values for sale in the area at her time of death.) I sold the house for $155, 000 and mortgaged the house for the new buyer. I understand that I have to pay taxes on the interest I receive on the loan amount (2 1/2 years of payments, then a balloon payment at the end of the 2 1/2 years.) How do I report all of this on this years income taxes? I did not receive any funds from the sale (a down payment) until Jan. 4 2016 of which I paid closing costs, escrow fees, etc.

  21. Hi M,
    For tax purposes, the cost of the home to you is equal to the market value on the date of death / inheritance. Since you sold the home within 1 year from acquiring it, you will have a short term capital loss.

    Any interest income that you earn will be taxable to you in Canada. Principal payments and the balloon payout do not attract tax.

  22. Hi Mann,
    Canadians do not pay tax on foreign inheritances received. You will have to complete form T1135 to report your assets outside of Canada. Any interest income earned on the $200,000 in India will be taxable to you in Canada. You can claim a foreign tax credit to avoid double taxation.

    Note: You can repatriate the $200,000 of cash tax-free to Canada.

  23. Hi Allan,
    My brother and I are Canadian citizens and our father past away and left behind land in Europe.
    Recently we are in process to transfer to our names. Hopefully the transfer will be finished in 2016.
    We have plan to sell all properties and transfer money to our bank accounts 50:50
    Depending of situation on the market it is possible value over half million.
    Do we have to report Canada Revenue and pay taxes on that.
    Thank you,

    Zack
    Thank you,

  24. Hi Zack,

    Thank you for the question. My response is as follows:

    You do not have to pay tax on the value of the inheritance received. Canadian beneficiaries do not pay taxes on inheritances.
    The cost amount of the land for Canadian tax purposes is equal to its fair market value (converted into Canadian dollars) as of the date of inheritance.
    If the cost amount is more than $100,000 Canadian, it must be reported on form T1135, Foreign Income Verification Statement.
    I you sell the property for more than its cost amount, there will be a taxable capital gain. Only half of the capital gain is taxable to you in Canada.
    You can claim a foreign tax credit on your Canadian tax return for part or all of the foreign taxes paid in respect of a capital gain realized in a foreign country.

  25. Hi,
    My sisters (2) and I (all Canadian Citizens) inherited an apartment from our Mom (was also a Canadian Citizen) in 2010 as a result of her passing. We are planning to sell the apartment. Are the funds from the sale of the apartment taxable in Canada? Also, can we transfer the funds to a Canadian Bank for withdrawal? Thank you!

  26. Hi Ruba,
    Upon sale of the condo, there will be a capital gain equal to the difference between the selling price (less selling costs) and the market value of the condo on the date of inheritance. One half of the gain is taxable. You will have to include 1/3 of the taxable capital gain in your income in the year of sale since you have a 1/3 interest in the condo.

    You can withdraw the sales proceeds from your bank account. This will not impact your taxes.

  27. Hello Allan,

    My brother and I will be inheriting two US properties from our aunt who recently passed and who resided in the USA. Both properties were rental properties that she owned for many years. Will we be taxed on these properties and if we sell them, or continue to rent them, will we be taxed in Canada? Will we owe foreign tax in the USA?

  28. Hi Ellen,

    Thanks for your question. You will not pay Canadian taxes on the inheritance received. However, you should have the properties appraised as of the date of inheritance. The appraised amount will become your cost basis for Canadian tax purposes. If you sell the properties in the future for more than the cost basis, then you will have a capital gain.

    If you earn rental income from the American properties, then you will have to file a US nonresident return (1040-NR). You must also report the income on your Canadian return (form T776). You can claim a foreign tax credit on your Canadian tax return for the American taxes paid, thereby preventing / reducing double taxation.

    Remember to file form T1135 with the CRA if the cost basis is more than $100,000.

  29. Hi Allah
    I inheritanced a house in Pakistan from my Dad.I get rent money from that house.
    Do I pay tax on that rent money in Canada???

  30. Hi Ahmad,

    As a resident of Canada, you must pay tax on your worldwide income, including rental income earned from an inherited property in Pakistan. You can deduct these expenses on your Canadian tax return in respect of the inherited rental property:

    – Mortgage interest
    – Property taxes
    – Utilities
    – Capital cost allowance
    – Repairs
    – Property management fees

  31. My uncle is coming to Canada from the US for a visit. He would like to bring family jewelry as well as silver arms to distribute as gifts from his estate.

    What is through protocol that must be followed example formal letter of gifting etc.

    Are these gifts taxable?

    Thanks

  32. Hi Jeff,

    Gifts are not taxable to the recipient in Canada. A gift letter documenting the nature of the gift, the name of the giver, and the name of the recipient is sufficient for income tax purposes. You should check with Canada Customs to find out the applicable limits for importing jewelry to Canada.

  33. My siblings and I have inherited a property in South America which will be sold shortly.
    What documentation will we need to provide with our tax returns to show where the money came from?
    The country where the property is does not make use of wills – it’s written in law which relatives of the deceased get what percentage of the estate.

  34. Hi Ana,

    Hire a lawyer in the South American country where the property is located to prepare a letter. The letter should provide the details of the inheritance, including the property’s address, the name of the deceased, the date of the inheritance and the names of the beneficiaries. Also hire a certified appraiser to provide the market value of the property on the date of inheritance. This value will be treated as the cost basis of the inherited property for Canadian tax purposes. If the cost basis is more than $100,000 CDN, then you have to disclose the property on form T1135.

  35. My siblings and I have inherited a property in South America which will be sold shortly.
    What documentation will we need to provide with our tax returns to show where the money came from?
    The country where the property does not make use of wills – it’s written in the law which relatives of the deceased get what percentage of the estate.

    1. Hi James,

      Hire a lawyer in the South American country where the property is located to prepare a letter. The letter should provide the details of the inheritance, including the property’s address, the name of the deceased, the date of the inheritance and the names of the beneficiaries. Also hire a certified appraiser to provide the market value of the property on the date of inheritance. This value will be treated as the cost basis of the inherited property for Canadian tax purposes. If the cost basis is more than $100,000 CDN, then you have to disclose the property on form T1135.

  36. “Hello Allan,

    Can CRA inquire with other country tax department for the money which we bring as an inheritance to Canada? Like did the client paid taxes to their home country before they bring money here in Canada or not.

  37. “Hello Allan
    live in USA..canadian citizen…work in Canada, ten miles across the border. Will inherit from Canadian parent … what inheritance tax would
    I need to pay?”

    1. Hi Dee,


      Canada does not impose an inheritance tax on the recipient of the inheritance. In Canada, the estate of the deceased will pay capital gains tax on any accrued gains as of the date of death. You will not have to pay tax in the US either because the deceased is not a US citizen and has no connection with the US.”

  38. “My aunt opened a co-joint bank account in both her name and mine outside of Canada, in which she intended to deposit money and leave it behind to use as i wish after she passes away.
    I currently live in Canada and my aunt passed away, would the money in the account be considered inheritance money for tax purposes.

    Thanks”

    1. Hi Jay,

      Distribution of assets, including cash, should be in accordance with your Aunt’s will. However, check with your bank to see if your Aunt added you as a beneficiary to the joint account in the event of her death.

  39. I want to give money from my foreign trust after my death to Canadian beneficiaries. I want to minimize the tax they pay, if any. How is a foreign trust (Guernsey) treated on death by the Canadian tax authorities? What choices do I have?

    1. “Hi Kathryn,

      The beneficiaries of your estate will not pay tax on a foreign inheritance received. However, if the funds are retained in the foreign trust after your death, then each beneficiary will have to pay tax on their share of the trust’s income for the year.”

  40. Hi
    my father in india has ancestral property in India, which in his will , he has given living rights to me till my death. but not selling / absolute rights. My son ( his grandson) becomes the absolute owner upon my death and can sell the property if he wants to. Would like to understand what is the tax implication of this arrangements when my father passes away to both to myself and my son. Are there any options to avoid Canadian tax for myself when my father passes away and my son when I pass away? from other post here, seems i wont be required to pay any inheritance tax. is that correct understanding?

    1. Hi Kumar,

      You will not have to pay an inheritance tax upon the death of your father. However, when you die and bequeath the property to your child, then your estate will have to pay a capital gains tax based on the increase in value of the property from the time you inherited it from your father to the date of your death.

  41. Hi Allan,

    I’m asking for a friend of mine. If his grandfather in China transfer him $40,000 CDN to his RBC account for a down payment as a gift for his first home. Does he have to report that income to the CRA? If he has to report it, what kind of prove does CRA require from him? Thank you very much for your help.

    Victor

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