US resident inheriting Canadian pension lump-sum

[ljvdb]

My wife and I moved to the US from Canada a few years ago (filed the Canadian departure return, etc.) and are now US residents. In 2014 my Canadian father-in-law died and although he passed with unpaid liabilities (estate will declare bankruptcy and won't leave much to inherit) his government job provided some life-insurance and a pension death benefit paid directly to the listed beneficiaries (i.e. outside of the estate). My wife was listed as one of the beneficiaries and as such she received some money from the life-insurance plan and pension plan.

I understand that the life-insurance proceeds (25K CAD) are not taxable in either Canada or the US, but the pension paid out a lump sump (40K CAD) that was subject to 25% non-resident withholding tax in Canada. My wife received an NR4 with income code 40, "Superannuation or pension benefits – Lump-sum payments". Since my wife did not receive any other income in 2014 I'll look into filing a non-resident return in Canada to see if I can recover some of the withholding taxes from Canada.

My question is about the US reporting requirements for the pension proceeds. Do I report it as:

1) The same way as if a individual takes a distribution from some other type of Canadian pension plan (e.g. RRSP)? I would report it under line 16b and apply foreign tax credit 1116 (general limit income or lump-sum)?
2) Do I report the pension lump-sum income as some other type of income (wage income line 7 or additional tax on IRA income line 59) and apply the foreign tax credit? Or some other line of the 1040?
3) The taxation of the foreign pension distribution is left up to Canada and exempt from US reporting (what section of the US-Canada protocol is this under?)
4) The lump-sum is considered part of the estate for US purposes and falls under estate tax rules and is not taxable (under the estate limit)?

If taxable in US, does this require the filing of a 3520 form?

I saw a suggestion on another thread http://forums.serbinski.com/viewtopic.php?t=9109 that the liquidation of an RRSP should report only under 16a? Under what section of the Canada-US protocol would the distribution from a Canadian pension be exempt from US taxes if it is not deferred?

[nelsona]

In Canada it would be good to try a 217 election return, since she had no other income.
1/2 Yes, General limit. income on 16b
3. Incorrect. Pensions can be taxed in US to the extent they are in Canada.
4. No, He has no estate in US.

[ljvdb]

Thanks for the quick response nelsona! I assume that this type of distribution does not require the filing of a 3520, correct (since it was employer paid pension and not some type of individual account like RRSP or RRIF)?

[nelsona]

Correct.