# Reporting 1099R income for Canadian tax calculation



## dorseyjf

I have received a small inheritance from my mother's estate and forms 1099-R as a result.
How is this income entered on my Canadian income tax return? I am a dual citizen.


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## BBCWatcher

To clarify, we should assume you are a tax resident of Canada as well, correct? And that the inheritance is from a U.S. estate specifically, hence the 1099-R?


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## maz57

You don't. There is no inheritance tax in Canada. A US estate will pay any US tax due before distribution to the heirs.

If the distribution is in the form of a capital asset (shares, real property, etc.) you should record the fair market value when it is transferred to you as that will be your cost basis going forward. 

If the distribution is cash and you invest it, any future income will be taxable in both Canada and the US.


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## BBCWatcher

However, depending on the size of the inheritance and your other overseas assets, you may be required to file a Canadian report, probably CRA Form T1135 named (confusingly) "Foreign Income Verification Statement."

I'm assuming you have a Canadian filing obligation, per my assumptions above.


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## maz57

BBCWatcher said:


> However, depending on the size of the inheritance and your other overseas assets, you may be required to file a Canadian report, probably CRA Form T1135 named (confusingly) "Foreign Income Verification Statement."
> 
> I'm assuming you have a Canadian filing obligation, per my assumptions above.


Why would dorseyjf be filing a Canadian return if he/she had no Canadian filing obligation?

If the inheritance (shares or cash) is received by the heir in Canada it has become a Canadian asset and therefore requires no reporting, foreign or otherwise. 

If, on the other hand, the asset remains in the US, then yes, it might trigger foreign reporting. The threshold for T1135 foreign reporting is fairly high at CDN$100,000.


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## Nononymous

maz57 said:


> You don't. There is no inheritance tax in Canada. A US estate will pay any US tax due before distribution to the heirs.
> 
> If the distribution is in the form of a capital asset (shares, real property, etc.) you should record the fair market value when it is transferred to you as that will be your cost basis going forward.
> 
> If the distribution is cash and you invest it, any future income will be taxable in both Canada and the US.


If the distribution was cash and the recipient brought that cash to Canada, why would anything be reportable in the US?


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## maz57

Because the O.P. stated they were a dual citizen. If the heir were solely Canadian nothing would be US reportable.


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## dorseyjf

Thanks, everybody. Yes, I am resident in Canada and have been for many years. Oddly, I paid nothing in Canadian or Ontario income taxes last year, yet paid $415 in U.S. income taxes. And Canadian taxes are high?

We will be investing the cash received in a Canadian Tax Free Savings Account. What a great incentive to save, especially for retired people with minimal wealth and no interest in paying any more income taxes than necessary!


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## BBCWatcher

OK, but TFSAs have potential U.S. tax and financial reporting requirements that you should be familiar with before deciding whether that's the right vehicle.

The original poster has not clarified _how_ the inheritance was received, at the moment it was received, and thus I do not jump to as yet unfounded conclusions and merely suggest checking whether a Canadian financial report (T1135 most likely) is due.


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## dorseyjf

We were told last year by a US tax preparer that the TFSA accounts that we already have must be reported on but that there is no U.S. tax liability under the treaty. 

The amount involved is under $100,000 U.S. and was received in cash, net of 10% withholding.


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## maz57

dorseyjf said:


> We were told last year by a US tax preparer that the TFSA accounts that we already have must be reported on but that there is no U.S. tax liability under the treaty.
> 
> The amount involved is under $100,000 U.S. and was received in cash, net of 10% withholding.


That is just plain wrong information; TFSAs receive no favorable treatment under the treaty. They may be Canadian tax-free but any income the account generates is fully US taxable. The only way that I can think of off the top of my head that there could be no US tax liability is if the TFSA held stocks which paid no dividends. In such a case no tax would be owed until a stock was sold triggering a capital gain. You need to research this thoroughly before making your decision. Depending on the type of TFSA you choose the US reporting alone can make them undesirable, let alone the tax. Most cross border specialists in the know advise duals to avoid them.

It also seems strange that 10% of your inheritance was withheld. Normally the estate pays any taxes due before distributing and no tax is owed by the heir.


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## Rosepetal

maz57 said:


> It also seems strange that 10% of your inheritance was withheld. Normally the estate pays any taxes due before distributing and no tax is owed by the heir.


I can explain that, sort of. Been through this confusing bit of tax stuff myself.

The US has IRAs; Canada has RRSPs. If you contribute to your OWN IRA or RRSP, then withdraw the money as required in your retirement, it's all covered under tax treaty and (aside from the US potentially taxing you above 15% and Canada not allowing you the excess foreign tax credit), it's pretty clear and both IRS and Rev Canada know what's what.

But Canada and the US treat inheritance on the death of an owner very differently. In Canada, there's no such thing as an "inherited RRSP." The RRSP is dissolved, the estate pays tax owing on their final/death tax filing, and the beneficiary gets the money free and clear.

In the US, the tax liability goes to the beneficiary. If you're a spouse, you can just treat the IRA as if it were your IRA, but if you're not the spouse, you can't. You can take the lump sum distribution and pay tax on whatever was contributed pre-tax by the owner (I don't know how that works with Roth IRAs), but it will be taxed in your hands at your rate of taxation in the US. You'll get 1099R just as if you owned the IRA, but it will clearly say Beneficiary on the form. That's what I think the OP did.

This confuses Rev Canada no end. Perhaps they have gotten more savvy since I went through this in 2008, but they couldn't understand why I was getting a 1099R showing withdrawals from an IRA if it wasn't my IRA but my inheritance.

If you ask Rev Can how to report withdrawals from your US IRA, they will tell you to put it on Line 130 on your T1 and claim a foreign tax credit for the tax you paid in the US. 
DON'T DO THIS. It is not a withdrawal from your IRA; it is not your IRA. It is an inheritance and not taxable income in Canada at all. (The US tax bite is also not available as a foreign tax credit).

For your Canadian taxes, you must find out the value of the account on the owner's date of death, and report capital gains on any increase in value between that date and when you took the lump sum distribution.

When talking to Rev Canada, if you feel the need to explain this, do not use the words "inherited IRA." Just say "inheritance." If they ask why you're getting a 1099R, say "I inherited FROM the IRA, but it's not my IRA."


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