Is your Inherited IRA Taxable in Canada?

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Any bookkeeping, business or tax article contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor can it be used to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.

First things first, what is an Inherited IRA?

An inherited IRA is an account that is conceived when someone inherits an IRA or an employer-sponsored retirement plan after the death of the original owner. The person (beneficiary) who inherits an IRA can be anyone: spouse, relative, or unrelated party or entity (inheritance or trust). So, we’ve got that covered!

 

Now, the question is, if I am currently residing in Canada and I receive an Inherited IRA or other foreign pensions from a deceased American relative will it be taxed?

The short answer is yes. If you receive an Inherited IRA from a relative who has been a US resident prior to their death your Inherited IRA will be taxable in Canada.

The reason for this is that Canadian Tax laws have a provision regarding the taxation of “Foreign Retirement Arrangements”. It means that the CRA has the right to tax your Inherited IRA. If your case is that the US withheld taxes coming from your Inherited IRA, then you will be able to claim foreign tax credit. However, there are limits on what you can claim as a foreign tax credit based on what is stated in the US-Canada Tax Treaty.

There are actually two instances that the legality of this taxation practice was presented before Canadian Tax Courts. In one instance, the appellant requested an alternative method of taxing the Inherited IRA and that outright taxing the Inherited IRA in Canada will result in double taxation. The appeal was rejected for both arguments.

In another instance, the appellant did not declare his Inherited IRA to the CRA and was then charged with penalties.  His argument was that the Inherited IRA was not taxable. His motion was rejected as well.

For both instances, the court decided that the CRA was well within its legal scope to collect taxes from Inherited IRAs. It is important that you declare your Inherited IRA or any other foreign pension inheritance to avoid coming to court and facing hefty penalties.

Cross-border taxes are confusing, but it doesn’t have to be! Get in touch with us today and we’ll help you navigate the confusing world of cross-border taxes!

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