Transfer of RRIF to spouse on death of US citizen

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mackayr
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Joined: Wed Apr 14, 2010 9:37 pm

Transfer of RRIF to spouse on death of US citizen

Post by mackayr »

For Canadian tax purposes, an RRIF may be transferred to a spouse's RRSP to avoid the FMV income inclusion on death. As long as the amount is transferred on or before Dec 31 of the year following death, the surviving spouse reports the full FMV as income on her return, and claims an offsetting deduction. How is this handled for US tax purposes?

In this instance:

US Citizen owns RRIF at time of death
Spouse is not a US citizen nor resident alien and has never elected to be taxed as such (ie. US citizen spouse always filed MFS)
Entire estate, including RRIF, is approximately $250k USD, so they're not subject to Estate Tax.

If the surviving spouse exercises the provision to transfer the RRSP to their own RRSP on death of spouse, how and when would this ever be taxed in the US? From my research, it seems that the ordinary requirement is that the FMV on death would be taxed on the Estate return of the US person (I'm not sure why not on the final US return, but that's another issue). However, the Treaty seems to be provide that the US would not tax in excess of what's taxed in Canada. In this instance, when filing the 2021 US 1040 (the individual just passed away a couple of weeks ago), it would then seem that the FMV would not be reported on the US return.

Assuming it's "too good to be true", it seems that the US would somehow get their tax - but how?
nelsona
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Re: Transfer of RRIF to spouse on death of US citizen

Post by nelsona »

There is a limit on how much a non-US spouse can inherit without tax, in 2018 it was about $150,000.
So unless the RRIF is less than that there will be gift tax to pay. Otherwise, no tax now (becuase the transfer did not give rise tho CDn income tax), and no tax later, since she is not a US person.

Don't be too surprised; the estate tax rules have lots of hols that allow taxable items to go untaxed at death.
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mackayr
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Joined: Wed Apr 14, 2010 9:37 pm

Re: Transfer of RRIF to spouse on death of US citizen

Post by mackayr »

Thanks for the informative response, Nelsona. That's what I suspected, but yes ... still kind of surprised.

The value of the RRIF in CDN is only $85k at the end of December 2020, so well under the threshold.

Is there a required 8833 disclosure for this, or because it's under the $150k limit, there's no requirement to report the lump sum transfer to spouse?
mackayr
Posts: 74
Joined: Wed Apr 14, 2010 9:37 pm

Re: Transfer of RRIF to spouse on death of US citizen

Post by mackayr »

Wait ... a non-resident spouse can only inherit $150k without incurring tax? They also have a joint stock portfolio valued at approximately $225k USD. I was planning on recording a disposition of the stocks and reporting the capital gains to time of death on his final return. Is there a tax on the principle amount bequeathed to his spouse in excess of $150k? His portion, based on their prorata contributions initially, is only 47%. On the Canadian side, we likely will not elect out of the provision to transfer them to her at his original cost, so his income will be limited to Canadian pensions.
nelsona
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Re: Transfer of RRIF to spouse on death of US citizen

Post by nelsona »

The stock is part of the inheritance given to her. it has to be included in the total.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
nelsona
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Re: Transfer of RRIF to spouse on death of US citizen

Post by nelsona »

Death does not trigger cap gains in US unless actaully sold. If they pass to the spouse, then they are responsible for tax when sold (which Cdn would nit have to worry about). Another reason why IRS wants to limit gifts to non-resident spouses.
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mackayr
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Joined: Wed Apr 14, 2010 9:37 pm

Re: Transfer of RRIF to spouse on death of US citizen

Post by mackayr »

Thanks for heading me in the right direction. On further research it seems that only US Situs property (eg. US stock) and real / tangible property located in the US is subject to the gift tax. This would include US stocks included in his RRIF. Furthermore, it seems that unless we can support the amount contributed by each spouse, the entire amount held in joint accounts would be considered his for this purpose.

If that's the case, and the threshold is $159k (for 2021), I think they'll be fine. They have no real or tangible property in the US and I doubt they're anywhere close to $159k in US stock.

Since his entire Estate is worth well under $11.4 million (ie. approx. $250k), I trust there are no other estate taxes to deal with either.

Am I misunderstanding what has to be included in the $159k?
nelsona
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Re: Transfer of RRIF to spouse on death of US citizen

Post by nelsona »

Be careful, I *believe* that the "in situs" definition only applies to non-citizens. US citizens estate include worldwide assets. Otherwise off-shore holding would not be subject to Estate tax, which we know is nit true.

If the death was of a non-US citizen, non-US taxpayer, then the in situs rule would apply. That is my recollection.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
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