Estate Planning for CA Resident US Citizen with US IRA

[dw]

I have a US IRA account worth about 600K. I plan to leave 400K to my Canadian spouse and 200K to my US based relatives. The beneficiary for the 200K portion is my estate. Am I correct in assuming this would automatically generate 200K in income in my year of death? Even if I were to designate my US relatives as beneficiaries, Canada would still consider it income because of deemed distribution rules. I am thinking that my estate will pay tax on the 200K left to the US relatives in both the US and Canada using a tax credit in Canada for taxes paid to the US.
I know this is very tax heavy and would appreciate it if you could tell me if there was a less tax heavy approach. Thanks.

[nelsona]

canada's taxation would be based on what was taxable (income taxable) in US. So, if you leave it all to spouse, none ould be taxable in either country.

But, as you say, whatever you leave to non-spouse would be taxable in Canada, so it would likley be best just to sell off that portion from the estate, and give them the cash, this allowing the eatate to take credit for the Cdn tax paid.

Otherwise you could see your seflf paying Cdn tax, and then your beneficiaries paying US tax without any credit,

[dw]

I was trying hard not to ask a follow-up, but I have another thought. If I make my US relatives the beneficiaries of the non-spousal portion of the IRA, then my estate would not pay the tax in the US, the beneficiaries would pay when they cash it in. Each of them are in a lower tax brackets than me. Since this is a non-taxable event in the US, would it be considered non-taxable in Canada as well? My confusion lies in the deemed distribution rule. Does this rule override the tax treaty treatment of US IRAs?

Thanks again.

[nelsona]

What's wrong with a follow-up?

Putting the issue of tax bracket aside (which doesn't mean anything in this context), you are correct that IF the bequeathe/transfer is not taxable in US, then it should not, by treaty, be taxable in Canada.

Just to clarify, the criteria for the treaty is NOT "non-taxable event", but whether or not the the income in question is "excluded from taxable income" or not. I only mention this as it is possible for no tax to be owed, but that does not make it non-tatxable.

I'm almost certain that the transfer to your beneficiaries would NOT be included in your taxable income, thus would not be taxed in Canada on your final return either. This applies to all your IRA bequests by the way, not just non-spousal portion.

By your method though, you are avoiding eventual Cdn tax on the portion you give to US heirs.

Good catch.