Inheriting RRIFSs/TFSA as a non-resident of Canada

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vinegarlady
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Joined: Thu Apr 28, 2022 8:08 pm

Inheriting RRIFSs/TFSA as a non-resident of Canada

Post by vinegarlady »

I am a Canadian citizen living in the US (on a green card). In October of 2021, my father died. I was named as a beneficiary of his RRIFs and TFSA. The accountant I've been talking to told me that the money disbursed from my father's RRIFs/TFSA is considered 'capital' and not 'income' and thus should not be taxed upon withdrawal, even for a non-resident. However, a representative from TD Bank told me that they would withhold a 25% non-resident tax when they disburse the money to me. My questions:

1) Should TD actually withhold a flat 25% tax when I withdraw this money? My understanding is that when someone dies, the value of their registered accounts is included as income and taxed at the marginal rate on the final tax return. If I then pay a 25% withholding tax, is this money not being taxed twice?
2) If the 25% withholding is appropriate, can I claim the 25% withholding as a foreign tax credit on my US return for 2022?
3) If the 25% is not appropriate, what's my best course of action here? I assume I can file an income tax return with the Canadian government to reclaim any over-withheld funds?
4) I would like to liquidate these accounts ASAP. Is there any reason for me to wait? Is it worth it to seek a section 116 certificate/"comfort letter", or to try to escalate this situation with TD management?
nelsona
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Re: Inheriting RRIFSs/TFSA as a non-resident of Canada

Post by nelsona »

Your accountant is wrong about RRIF taxation.

TFSA proceeds are free of all taxes, Cdn or US.

RRIF:
1. Since it appears that you were named specifically as beneficiary of the RRIF, and since you are not permitted. since you are not a spouse or dependent child, the RRIF is taxed in your name, rather than the estate, therefore, as a non-resident the collapse will be withheld at 25%. That is your final tax for Canada. Otherwise, the rrif would be included in the estate, taxed at the rates of the deceased and you would simply get the remaining proceeds free and clear. So you might want to check with the executor about this, with no Cdn or US tax consequences.

I'll answer the rest assuming that you were named directly in the RRIF
2, Yes. You will include the entire RRIF as income on your 1040, and can use the 25% as a credit.
3. See 1. if the rrIF is part of the estate, then TD should be withholding as any other Cdn resident, and issuing the estate a tax receipt.
4. Does not apply. Tax is owed, your executor should know who gets the money first (estate or you) and pays the tax and when it flows to you.

The TFSA, and any money from the estate that flows to you NOT as income, shoudl be reported as a gift on an IRS Form 3520 if more than $100K US.

So, this provides a tip for others in the same situation: While there may be some probate and tax advantages from naming someone directly beneficiary in a RRSP or RRIF, when the intended inheritor is a US person, it may be best simply to leave the estate as the beneficiary, and name the person in the will as inheritor of those funds.
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: Inheriting RRIFSs/TFSA as a non-resident of Canada

Post by nelsona »

in #1, I omitted, not permitted to roll the RRIF into your own account...
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
jtserbinski
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Re: Inheriting RRIFSs/TFSA as a non-resident of Canada

Post by jtserbinski »

I'm going through this right now, and so far have received one RIF, full proceeds. The tax at collapse of the RIF at death is paid by the estate in the final return. The estate is issued a T4RIF with Box 18. I was told the investment GAINS from death to when it is paid out to me is taxed. They would be issuing me an NR4 with 25% withholding (I'm dual citizen, US resident). I asked whether the withholding shouldn't be 15% under the US-CAN Tax Treaty? The bank rep said no, trust income is 25%.

Does anyone know if it is 15% or 25%?

Afterwards, I confirmed the CRA considers income from an estate to be trust income. Further, when I looked at the US-CAN Tax Treaty, under "Other Income", it does say trust income may be taxed at a preferential rate of 15%, but the wording is very lawyer like and the last semi-sentence inscrutable ...
https://www.canada.ca/en/department-fin ... -1997.html

"2. To the extent that income distributed by an estate or trust is subject to the provisions of paragraph 1, then, notwithstanding such provisions, income distributed by an estate or trust which is a resident of a Contracting State to a resident of the other Contracting State who is a beneficiary of the estate or trust may be taxed in the first-mentioned State and according to the laws of that State, but the tax so charged shall not exceed 15 per cent of the gross amount of the income; provided, however, that such income shall be exempt from tax in the first-mentioned State to the extent of any amount distributed out of income arising outside that State."
MaggieA
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Joined: Sun Oct 31, 2004 4:06 pm

Re: Inheriting RRIFSs/TFSA as a non-resident of Canada

Post by MaggieA »

I'm a dual citizen residing in Canada, and my dad died in December. My sibling and I were named beneficiaries on both dad's TFSA and RRIF. The investment firm where they were held knows I'm a U.S. person. Early this year, I received a half share of each account, with no tax withheld. The estate received a T4RIF for the RRIF, with the full amount in box 18 (Amounts deemed received by the annuitant - Deceased). I believe the procedure would have been the same were I residing in the U.S. i.e. no tax on TFSA, estate pays the tax on the RRIF.

By the way, I will have to file a 3520 this year regarding these amounts, because they total in excess of $100K USD. I was completely unaware of this, so was shocked to learn that the noncompliance penalties for this gift reporting make FBAR penalties look small. It's very important to know about, if you're a U.S. person who might receive an inheritance or gift from non-U.S. family. Doesn't make any difference if you're residing in or outside the U.S. With the way global housing markets have gone up, $100K USD is not as large a sum as it might once have seemed, so people who don't think of themselves as wealthy may encounter this.
rafa02
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Joined: Sat May 26, 2012 3:18 pm

Re: Inheriting RRIFSs/TFSA as a non-resident of Canada

Post by rafa02 »

nelsona, I want to make sure I understand your comment, and it applies to a non-resident of Canada.:

"So, this provides a tip for others in the same situation: While there may be some probate and tax advantages from naming someone directly beneficiary in a RRSP or RRIF, when the intended inheritor is a US person, it may be best simply to leave the estate as the beneficiary, and name the person in the will as inheritor of those funds."

My understanding is for a Canadian resident, the RRIF is immediately collapsed upon death of the account holder, at FMV, and is included as income on the decedent's final tax return, both US and Canadian, and the Canadian resident(US citizen) beneficiary would not have tax obligation, only a reporting obligation.
nelsona
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Location: Nowhere, man

Re: Inheriting RRIFSs/TFSA as a non-resident of Canada

Post by nelsona »

Correct.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
rafa02
Posts: 95
Joined: Sat May 26, 2012 3:18 pm

Re: Inheriting RRIFSs/TFSA as a non-resident of Canada

Post by rafa02 »

Thank you.
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