US Inheritance from Father to US citizen - Canadian resident -

QUESTION:

I am a US citizen working in Toronto area for the next few years. My father (US citizen in NJ) recently died and I will be receiving a sizable cash distribution ($100K usd+/-).
Is there any reason to be concerned about being taxed either by the US or CA or is this money free from taxes?
If necessary I could postpone the distribution until I return or have the money deposited into my US bank account but my mutual fund company will not accept the money into my retirement IRA while I am in CA.
Is there another option for putting this money to work for me until I return to the states?

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david ingram replies: - I pulled this out of the rejected file because I was watching the Republican convention and wandering through them.
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As a Canadian resident, you are taxable on your world income no matter where it is and no matter what method you use to hold the money unless you have an ACTIVE foreign corporation with FIVE full time employees who are NOT RELATED TO YOU.

In the case of the ACTIVE corporation, you are still taxable on any monies paid or credited to your account but it is considered a foreign corporation and the internal earnings are not taxable to you.

And, if your Foreign holdings exceed $100,000 Canadian, you must also file form 1135 or face $25.00 a day penalties to a maximum of $2,500 for failure to file the form.  If the money has not being reported, the penalties can be muuuuucccchhh larger/

US CITIZEN 'anywhere'

On the other hand, as a US citizen, you are also taxable on your world income no matter where it is and no matter how it is held.  In the case of a foreign corporation, the rule is that you must report your share of internal earnings whether paid to you or not when your share of the company is 10% or more with three different levels of reporting.  failure to report ANNUALLY on US form 5471 is a penalty of $10,000 for the first 90 days and $10,000 MORE each 30 days thereafter to a maximum of $50,000.

You should go to www.centa.com and read the Oct 95 newsletter which details the responsibilities of a US citizen out of the country,.

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Back to your question.

The inheritance itself is not taxable to you in either country with a possible exception. 

Sometimes, you will be the recipient of the last ten years of a pension or an annuity an din this case you will be taxable on the monthly  payments from the pension.  In this case, under the  rules of the US Canada  Income Tax Convention (treaty) you will only pay the US 15% tax on the pension or annuity under ARTICLES XVIII and XXIV.

However, if you receive $5,000,000 in the Bank of America, your father's estate would have paid any tax before you received it.

And I am worried about your statement about leaving the money in the US as if that would make the money non-taxable in Canada.  It just does not work that way. 

Putting the US income on a US return and the Canadian income on a Canadian return and not have the other country's income on one of the other returns so that you have reported world income to the country in which you are a resident is a criminal offense if the IRS or CRA want to prosecute.

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these older questions might help as well  for ideas.
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david ingram replies

When you arrive in Canada, your assets are all valued as of the day you arrived.

Any taxable gain or loss is calculated from that date.

If you sell the house and items in the inheritance before you come, there is no tax.

If you come and live in Canada for five years (IN A RENTED PROPERTY) or less and rent out or leave the family home empty, there would not be any tax on the US house payable to Canada if you filed a section 45(2) election to claim the home as your family home even though you did not  live in it.  However, if you did that for more than three years, it could come up as taxable in the US because you have to have physically lived in it for 24 out of the last 60 month period.
If the inheritance was compose d of stocks, you can have an interesting situation since each stock, security, mutual fund, limited partnership, bond, etc is valued separately as you come across the order.  If there are only ten stocks it is no big deal.  If you have 200, it is an accounting nightmare, especially if you sell off part of a holding.

A simple example would be:

You arrive on July 31 with three stocks you owned for a period of time.

Coincidently, you paid exactly $10,000 for each stock and there are 1,000 each so you paid $10.00 a share for 3,000 shares or $30,000 US.

The first complication could be different exchange rates at the time you bought them which would apply to anything you buy when a resident of Canada but in this case, we are only concerned with the exchange rate the day you came to Canada and for this purpose, I will ignore exchange.

So you arrive on Jan 31, 2008  and the day you arrive:

Stock A (you paid $10,000) is worth $5,000

Stock B is still worth exactly $10,000, and

Stock C is worth $30,000 making it all worth while.

Then a year later on Jan 31, 2009 you sell Stock A for $10,000.  For Canadian purposes, you owe tax on $5,000 because it was only worth $5,000 when you moved to Canada

Then a year later on Jan 31 2010 you sell B fro $15,000 and owe Canada tax on the $5,000 profit.

Then on Jan 31, 2011, you sell Stock C for $15,000 and have lost $15,000 because it was worth $30,000 when you came to Canada.  You then get to carry $5,000 of the loss back to 2009 and $5,000 back to 2010 and carry the other $5,000 loss forward against future profits.


You should go to www.centa.com and read:

1.   The US / Canada Income Tax section in the second box down on the right hand side.

2.   The October 1995 newsletter in the top left hand box.

This older Q & A might help as well.

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It is highly unlikely that I will be able to sell the house before my arrival in Canada, (Also, if each year I receive distributions from the annuities during the next five years, the possibility that I may be liable for Canadian taxes on these distributions if I reside in Canada over the next five years is also a great concern).  Do you think it would be best to liquidate all the assets now, even if it means paying additional US taxes?  Also, if I simply appear in Canada for a week or two in May, and then return to the US (with the expressed intention of returning to Canada later on in 2008), does that mean that I can be considered a Canadian resident, and thus liable for taxes from all the proceeds of the estate?  Am I actually considered a resident from the minute I land in Canada, subject to taxes on worldwide income?  I doubt that I can liquidate all the assets of the estate before my arrival in May, so this is naturally a major concern.  As I'm planning to


 move to Victoria, I
 would be looking forward to working with your firm in the future, provided, of course that I'm not going to be taxed to death!  Your answers here would be most appreciated.

    Thank you so much,

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david ingram replies:

This question came from www.jurock.com, the best real estate site in Canada and likely North America if not the world.

Your immigration to Canada does NOT make you taxable in Canada until you actually move here. 

If you come to Canada and get your PR (permanent resident) card and then return to the US, you will not be taxable in Canada on US income until you actually move here.

This is because of Article IV of the US / Canada Income Tax Treaty which will only tax you in the US on US income if that is where your home is and that is where you are for more than 183 days and that is your citizenship.

To maintain your PR card, you have to be physically present in Canada for 24 out of the 60 months after you get the card. 

If you were to spend 5 months a year in Canada and 7 months in the US for the next ten years, and did not have a Home available to you  in Canada on a year round basis, you would keep your PR card alive and Canada would NOT have the right to tax you on any of your US income.  If you worked in Canada for the five months you were here, or had investments in Canada, Canada would have the right to tax that money first and then you would report it to the US again and have to pay tax to the US.  However, any tax paid to Canada would be a foreign tax credit on US form 1116.  It would not be double taxation.

As soon as you stay in Canada for more than 183 days in a year, Canada has the right to tax you on your world income.  However, Canada would give you credit for any tax social security and Medicare  you paid to the US federal and or state governments. 

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