Estate and Inheritance Taxes on a Canadian's US IRA

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dbaezner
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Estate and Inheritance Taxes on a Canadian's US IRA

Post by dbaezner » Wed Jul 11, 2018 4:40 pm

Hi. I'm a former US person (turned in my green card) who has a traditional IRA (about $200K) left in the US that I would like to leave to US friends when I die. As far as I know, the IRA amount must be reported on my final Canadian return when I die and will be taxed. Will the IRS also tax these same funds? Also, once both countries have taxed the IRA, will the US beneficiaries have to pay taxes on the inheritance?

Thanks
Dirk

nelsona
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Re: Estate and Inheritance Taxes on a Canadian's US IRA

Post by nelsona » Wed Jul 11, 2018 5:13 pm

For Canada, as you say, it will be deemed to have been disposed of at death, so if you have other more liquid funds that can cover the Cdn tax, then the beneficiaries will inherit the full amount, otherwise some of it may need to be sold to cover the tax.

It is unlikely, unless your estate is VERY large, that you would owe any estate tax, and this would probably be covered by any Cdn tax your estate paid.

There is no inheritance tax in either country.

So, these named beneficiaries would get their full share of the IRA, and be able to choose to take it right then, and pay taxes, over a five year period, or stretched over 30 years, if eligible.
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dbaezner
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Re: Estate and Inheritance Taxes on a Canadian's US IRA

Post by dbaezner » Wed Jul 11, 2018 9:24 pm

Thanks for responding. The last two sentences seem to be contradictory. If there is no inheritance tax, then why would the IRA beneficiaries be taxed, whether over 5 or 30 years.

Thanks
Dirk

nelsona
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Re: Estate and Inheritance Taxes on a Canadian's US IRA

Post by nelsona » Thu Jul 12, 2018 11:15 am

Inheritance tax, as I think most envision it, is that you are gifted $1000, and the government FIRST takes some percentage, and the inheritor is left with the rest, regardless of income levels, much like estate tax.

The tax on inherited IRA's is simply income tax. The immediate, 5 or 30 year period comes from the fact that, since these named beneficiaries are not your spouse, they cannot simply hold on to these IRA funds, and must take them as income in a prescribed manner. Your spouse would not have to do this, they would simply make it their own IRA. If this was simply cash and not an IRA, they would inherit the whole thing free and clear, since there is no inheritance tax.
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nelsona
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Re: Estate and Inheritance Taxes on a Canadian's US IRA

Post by nelsona » Thu Jul 12, 2018 11:31 am

The whole estate/probate/income tax issue that arises at death is very complex, and to simply deal with one aspect-- your IRA left to non-spouse -- and taking nothing else into consideration, leaves a lot of unknowns.

What we know, regardless of your other income/wealth at that time: In Canada, YOU will owe INCOME tax on the deemed collapse of your IRA. Any estate tax you pay on that IRA (which will still be intact, since you named beneficiaries) can be used in Canada against the income tax arising.

Your IRA beneficiaries will inherit the intact IRA, but will need to immediately start to take income from it, since it is not your spouse, and be taxed on that income. Failed to mention that any US estate tax you pay on that IRA, can be used as a credit by your inheritors, against the income tax on that IRA.
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rlb
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Re: Estate and Inheritance Taxes on a Canadian's US IRA

Post by rlb » Thu Jul 12, 2018 4:00 pm

I was under the impression that if, say, my children converted properly to an inherited IRA, they would incur no immediate US tax, though they would need to start immediate RMD's based on their own lifetimes. I reasoned that because this was an non-taxable event in the US, it would be also a non-taxable event in Canada because of the treaty's non-discrimination clause. Am I wrong in this, then? The whole IRA would get Canadian income tax in the last year of life? That would be an immense tax at the highest rates!

nelsona
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Re: Estate and Inheritance Taxes on a Canadian's US IRA

Post by nelsona » Thu Jul 12, 2018 9:55 pm

You make a good point. . Since this would be a transfer of an IRA it is a non-taxable event in US (only if there are named beneficiaries, not if the IRA is left to the estate) then there should be no tax in Canada. Its not the non-discrimination clause that covers this, it is the pension clause.

The manner of RMDs you are describing is the 30 year choice I mentioned. The inheritors also have the option of immediate or 5 yr collapse.
Your inheritors would of course have to pay US tax, and Cdn tax if living in Canada, on that IRA income, starting immediately.

Btw, the large tax hit in the year you die is not unusual, for example that would be exactly what happens to your RRSP/RRIF when you die and don't leave to spouse, so prepare for that.
Nelsona Non grata. Non pro. Search previous posts.

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