Inheritance of IRAs for US citizens resident in Canada

[rlb]

A dual citizen (US-Canada), who is a Canadian resident for several years, dies owning US IRAs (not Roth). In step 1, the beneficiary is his wife, also a dual citizen living in Canada. From the US point of view, the IRAs become the wife's IRAs.

(1) Does Canada allow this without any tax at the time? I.e., just re-titling of the IRA in her name?

In step 2, the wife later dies (2nd to die). In this case, since her husband has predeceased her, she has named as beneficiaries their three children, also all dual citizens, but all are US residents.

(2) Does Canada allow the re-titling of the IRA in the children's names according to the way the US would handle it? If not, how best to handle this: for example, if the IRA's were made payable to the estate of the wife, is there any foreign tax credit available to offset the wife's final-year tax return in Canada (IRA would be treated in Canada as deemed income to her, I think) to taxes due in the US because of the dissolution of the IRAs?

What is the best way to handle this? Would it be to take extra money from the IRAs over the remaining life span of the husband and wife with the goal of reaching near zero balance by the time of death?

By the way, unless something major downwards happens to the estate tax limits, the estate (even of the second to die, and including IRAs) is not large enough to trigger US estate taxes.

[nelsona]

1) Yes. The treaty would protect her, since it is not a taxable event in US, it acannot be in canada.

2) The IRA transfer would be taxable in canada only to theextent that it was taxable (income taxable) in US. So, there would be matching taxes.

[dw]

Just to clarify, if the US IRA is transferred to a non-spouse, there would be no deemed distribution in Canada because of the tax treaty? The non-spouse heirs can spread the IRA distributions over their life expectancies so would be paying US income tax over the next 30 years possibly.

[nelsona]

Paying tax in US AND Canada.

[rlb]

One further clarification requested: If the IRA is transferred to a child or children who are US residents, not Canadian, and remain US residents for the rest of thier lives, then would no tax ever be due to Canada?

[nelsona]

Of course not.