# inheritance from u.s. into canada



## heron111

Hello!

I'm hoping someone may have some info on the logistics/laws of receiving an inheritance from the U.S. as a dual citizen living in Canada. (Born in Canada, moved to U.S. as a child, naturalized, then moved back to Canada)

Is it better to keep the money in the U.S.?( I have lived in Canada for 35 years and have only just discovered the new tax law about filing in the U.S. so I will do this.) From a tax standpoint would it be to my advantage to keep it there as an IRA? Or...would it better to bring it to Canada, again, from a tax standpoint. 

I have been getting different information from different accountants and am at my wits end really. I am holding up the inheritance from the other beneficiaries, and so a decision must be made.

I would really appreciate any feedback. Many thanks!


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## BBCWatcher

I'm assuming you are not inheriting from a spouse. For inherited IRAs the decision is quite simple:

1. If you need the money now, you have no choice: withdraw the money and pay whatever taxes are owed.

2. If you don't need the money now you still have no choice: you must begin making withdrawals from the IRA, otherwise there are penalties. However, you should make the annual withdrawals as slowly as the tax life expectancy calculation allows, subject to your financial needs of course.

Note that qualified Roth IRA withdrawals are free of U.S. taxes.

I suspect the Canada-U.S. tax treaty will have something to say about inherited IRAs, so check that.

If you withdraw as slowly as the IRS allows you're maximizing the tax benefits: either enjoying more tax free gains (Roth) or deferring taxes on (bigger) gains (traditional IRA). But you must withdraw at least the calculated minimum every year per the rules, otherwise there are penalties.


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## Bevdeforges

You probably want to take a look at IRS Publication 590, where there is a section headed up "What if you inherit an IRA?": Publication 590 (2012), Individual Retirement Arrangements (IRAs)

Whether it would benefit you to keep it in the US or move it up to Canada depends on lots of factors - including what, exactly, you'd do with the money once you got it to Canada. If it's a traditional IRA, you'll pay taxes on it as you withdraw funds, and the taxes are lower on smaller amounts withdrawn each year. If it's a Roth IRA, then it's not taxed on withdrawal - at least not if it's "your" IRA, but there are other rules you have to abide by.

The other factor is what are the tax rules in Canada for whatever you would do with the funds. I looked into transferring my IRA from the US to France at one point, and decided that I'd wind up being effectively double taxed on the money - once when I withdrew it from the US and again when I took benefit of the French treatment of "life insurance" benefits. But it really depends on your particular needs and intentions for what to do with the money.
Cheers,
Bev


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## heron111

Thank you very much for this. I also need a very good accountant to assist me with all this. These points will be discussed in the next meeting with an accountant...Could by any chance refer one in Vancouver B.C.? The fee for a streamline return is $3,500, and with a different firm $5,000..this does not include the inheritance fees. Does this sound reasonable to you? 
Many thanks and I truly appreciate your time.


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## Bevdeforges

To me, a fee of $3500 - 5000 for filing US personal income taxes sounds pretty outrageous - but normally, it's a function of how long the preparation will take. And that's a function of what your financial situation is, so I'm not really in a position to evaluate. Figure, at $100 an hour they're saying that your returns will take 35 to 50 hours to complete. (For some people with complex finances, that could be entirely appropriate.)

It also depends a bit on what you're going to contribute to the process. If you are going to present a shoebox full of various receipts and records, it will cost you more than if you have your records well organized and/or already data entered in some format the accountant can use.

On the IRA, it depends on where it has been invested. The large investment companies that handle deferred investment plans (Fidelity or Vanguard, for example) can often provide excellent advice for transferring funds over the phone, though they may not be able to offer much tax advice. 
Cheers,
Bev


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## Nononymous

Relatively straightforward returns, where they just take your Canadian and translate it to the appropriate US paperwork, can be done for as little as $350, or so I am told. I would shop around before paying an accountant ten times that much. Unless of course your finances are indeed that complex, in which case, money is likely not an object anyway.


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## heron111

thank you!


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## BBCWatcher

You may also be able to do much of the work yourself using the free TaxAct.com (for example) then sharing that with an accountant.

With respect to the inheritance, as a general principle if there's tax (or bank fees) owed it tends to occur when money is moved. So if you don't have to move the money (because you don't need it) then probably the wise thing to do is not to move it. Since you're a U.S. citizen you have access to U.S. financial firms such as Vanguard, Fidelity, and Schwab as mentioned. To expand on that point, if the IRAs are held at a major firm then they probably should be consolidated (if they haven't already) per deceased individual and per type (Roth and Traditional) so that there's one or two accounts, each perhaps with multiple holdings. I would make sure the funds are invested in low cost risk-appropriate index funds, although they should tend toward the higher yielding funds since IRAs are tax advantaged accounts. Annual required distributions can be paid into your personal account with the same financial institution. If you qualify for making a Roth IRA contribution on your own you could do that. (That's trickier if you are using the foreign earned income exclusion. The foreign tax credit might work better for you depending on your Canadian income tax rate and especially if you are having to pay tax on Traditional IRA withdrawals. The FTC would also allow you to make a Roth IRA contribution in your own personal account.)

Fidelity and Schwab both have low cost checking or savings accounts with ATM cards that can be used to withdraw cash in Canada at reasonable rates. Vanguard generally offers free wire transfers, although it might depend on the size of your account. So you can get the money into Canada, but you'll pay the exchange rate spread when you do it. What many people do is keep their U.S. dollars and then use them (with that ATM/debit card) when visiting the U.S. rather than paying fees to their Canadian bank and credit card companies. (Though the new Chase Amazon.com credit card now offered in Canada is pretty good for international travel.)

Anyway, and as a rule of thumb, minimize money movements if you can. Pick a good place for the money to keep working for you, not working more for the financial institutions.


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## Rosepetal

Do yourself a favour. Take the tax hit in the U.S. and move that money out of the inherited IRA. Bring it into Canada and if you have the room in your RRSP, put it into an RRSP

If you leave it in the U.S., first of all you're probably going to run into problems with the brokerage firm it's with. Many of them won't deal with you, US citizen or no US citizen, if you live in Canada... they are not licensed to sell securities to residents of Canada and so you won't be able to move that money around to different funds or do anything except let it sit there in the present fund. 

But the major reason you should move it into Canada is the tax treatment of IRA distributions versus inherited income in Canada. 

If you take it a lump sum distribution and pay income tax to the US on that amount, Canada WILL NOT TAX THAT LUMP SUM AT ALL. It will be treated as an inheritance and you will start paying tax on the dividend/interest generated once it's in Canada. 

On the other hand, if you leave it in the US, you will have to start taking a yearly Required Minimum Distribution because US tax law says that with inherited IRAs, you can't leave the money in there till you're 70 as you would with your own, non-inherited IRA. You will owe the US some income taxes every year on that Required Minimum Distribution, and the financial institution will withhold a part of the money and send it to the IRS to cover that obligation.

Now here's the kicker... you will also have to report that yearly RMD as income in Canada. It goes on line 130 as Other income on your T1. It is NOT treated as pension income, and there is no distinction between the principal that you inherited, and any dividends or interest that were earned within the IRA after you inherited it.

So if you're following me here, you'll end up paying taxes to Canada on every penny you get from the IRA if you treat it as an inherited IRA and take the money out year by year, but you won't pay taxes to Canada on the principal you inherited if you take it as a lump sum inheritance.

The reason seems to be that Canada and the US have an agreement about RRSP and IRA income in the tax treaty, but Canada does not allow inherited RRSPs... when someone dies, their RRSP is dissolved and taxed as part of the estate, then distributed to heirs. So they don't recognize your inherited IRA as an inheritance. It's treated as income.

To add insult to injury, the US will tax your IRA income in the tax bracket you'd be in if all your income (including Canadian wages) were made in the US. If you have $50,000 of wages in Canada, and $1000/year from the IRA, you'll probably end up paying $200 or $250 in taxes to the US.

To avoid double taxation, you'll have to fill out the Foreign Tax Credit form in Canada to get credit for those income taxes you paid on the IRA income in the US. But Canada will not let you claim more for more than 15% even though you were taxed at, say, 25% or 28%, because the tax treaty says that both countries agree to limit taxes on pensions to that amount when they're paid from one country to a resident of the other country. 

I know, this sounds insane. Can you tell I've had to deal with it? Been on the phone with Rev Can every year, and every year they tell me the same thing so I guess it's the law. I learned my lesson and when my 2nd parent passed away, I took the lump sum. Much, much better.

Take the money, pay the US its pound of flesh, and RUN for the border. That's my advice.


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## BBCWatcher

The original poster is a dual citizen, so we should keep that in mind.

On the subject of U.S. financial institutions, two points. First, IRAs are not funds that should be actively traded. The funds could/should be in something like Vanguard's "Target" index fund. (Fidelity offers something similar.) A trading freeze is not a bad thing here as long as dividends are automatically reinvested and required minimum distributions can be made. Second, U.S. citizens need to file a W-9 with the institution. If that doesn't work, find another institution. (But I don't think this is a problem anyway because, unlike you, the original poster is only one of several heirs, and presumably the executor of the estate is in the U.S. and will be dealing with the financial institution.)

Also, the answer partly depends on what the other heirs want to do.

And the answer depends on Roth IRAs versus Traditional IRAs. It sounds like you were dealing with Traditional IRAs which are U.S. taxable at ordinary income tax rates. That's true whether they're withdrawn in a lump sum or not. It's better to defer those taxes if possible to increase the gains, and it is possible. If Canada then wants 15% no problem: that 15% is creditable against U.S. taxes owed via the Foreign Tax Credit. The net impact is you'll still pay the same U.S. rate, but Canada may get some of the tax.

On the other hand, Roth IRAs are U.S. tax free with qualified distributions and, importantly, are also specifically protected by the tax treaty. With Roths it's also important to stretch the tax benefits out as long as possible by maximizing the gains. When withdrawn they're free of U.S. tax and, by treaty, Canadian tax.

It's important to check the treaty and hold both tax authorities to it. (Yes, tax officials sometimes make mistakes.)


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## BBCWatcher

To elaborate slightly on the last point, if we're talking about inherited Roth IRAs here it's very, very hard to beat tax free in both countries, and that seems to be what the treaty says. Consequently it makes sense to maximize that tax benefit by stretching it out as long as possible taking only required minimum distributions if possible. That way all the past and future gains are tax free.

Obviously that's something to check.

With respect to Traditional IRAs, another problem with withdrawing too much too quickly is that it can push you into a higher U.S. tax bracket. Thus you'd pay more tax on money that has had less time to grow. While it's somewhat less of a problem with a TIRA to withdraw too much too soon, it's still a problem.

I've just quickly read through the tax treaty, but it's possible TIRA withdrawals by Canadian residents (only) are subject to the 15% rate and -- and I'm not sure about this, but it looks like it might be -- only the 15% rate. That is, it might be possible to claim a treaty benefit on the U.S. side and exempt the TIRA from all U.S. tax and only pay the Canadian tax. But even if that's not possible my general recommendation remains ("withdraw as slowly as possible"), subject to verification with an expert accountant.


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## jcr123

heron111 can you tell me what you did? I'm in the exact same situation and I need to decide as my siblings are waiting. Did you take a lump sum? How much tax did you pay? Where you able to find an institution that would set aup an inherited IRA as a Canadian resident? Thanks!


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## jcr123

Can you tell me how much tax you paid on the pay out?


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