How is a Canadian inheritance taxed for a U.S. citizen? Questions about retirement accounts and rental properties

The taxation of Canadian inheritances for U.S. citizens can be complicated, but let me try to clarify a few things. For the Canadian rental properties, there is indeed a difference in how Canada and the U.S. handle the "step-up in basis." In Canada, there's a deemed disposition at death, meaning the assets are treated as if they were sold at fair market value, potentially triggering capital gains tax in Canada. However, as a U.S. citizen inheriting these properties, you generally would receive a stepped-up basis for U.S. tax purposes to the fair market value at the date of death. Regarding Canadian retirement accounts like RRSPs or RRIFs, these are more complex. They don't receive a step-up in basis. When a non-spouse beneficiary inherits these accounts, they're generally taxable as ordinary income when distributed. You may face tax obligations in both countries, though foreign tax credits might help prevent double taxation.

After dealing with a similar mess with my uncle's estate last year, I highly recommend checking out https://taxr.ai for cross-border inheritance situations. I was totally confused about Canadian vs U.S. tax rules, especially with retirement accounts. They analyzed all his Canadian accounts and property documents and showed exactly what would be taxable where and when. Saved me thousands in potential tax mistakes since the IRS and CRA have different rules about this stuff.

I have to admit I was wrong about being skeptical of taxr.ai. After our discussion here, I tried it with my mom's Canadian RRSP statements since she's planning to leave them to me. The service immediately flagged that these accounts don't get the step-up in basis that regular investments would, and showed me exactly how the distributions would be taxed. It even created a timeline showing how taking distributions over several years instead of all at once could save me nearly $14,000 in taxes! Much better than paying my accountant $800 just to tell me he "wasn't sure about Canadian accounts.

If you're trying to get official clarification from the IRS about handling your Canadian inheritance, good luck getting anyone on the phone. I spent TWO WEEKS trying to reach someone about a similar situation with my grandfather's Canadian property. Finally used https://claimyr.com and got through to an actual IRS agent in 45 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c - they basically hold your place in the phone queue so you don't have to stay on hold all day. The agent was able to confirm exactly how to report the Canadian property on my U.S. return.

I need to publicly eat my words here. After dismissing Claimyr as a likely scam, I decided to try it yesterday because I was desperate to talk to someone at the IRS about my own Canadian inheritance situation. Not only did it work, but I got through to an IRS international tax specialist who answered all my questions about reporting my aunt's Canadian property on my U.S. return. Saved me hours of hold time and probably weeks of stress. Sometimes being proven wrong is actually a good thing!

Don't forget about FBAR requirements! If you inherit Canadian bank or investment accounts that exceed $10,000 total, you'll need to file an FBAR (FinCEN Form 114). This is separate from your tax return and has hefty penalties if you don't file. I found this out the hard way when I inherited from my Canadian grandmother.

Has anyone dealt with claiming foreign tax credits for taxes paid to Canada on inherited assets? My dad inherited some Canadian stocks last year and ended up paying taxes twice because he didn't file the right forms.

This is such a timely discussion for me! I'm dealing with a similar situation where my Canadian mother-in-law is planning her estate and we're trying to understand the implications for my spouse (U.S. citizen). One thing I haven't seen mentioned yet is the potential impact of the U.S.-Canada tax treaty. The treaty can provide some relief in certain situations, particularly regarding the treatment of retirement accounts and preventing double taxation. For example, distributions from Canadian RRSPs to U.S. beneficiaries may be eligible for reduced withholding rates under the treaty. Also, timing can be crucial - if your parents are still alive, there might be opportunities to restructure some assets or make strategic distributions that could minimize the overall tax burden when the inheritance occurs. For instance, your parents might consider making annual gifts within the U.S. gift tax exclusion limits, or converting some RRSP assets to other investment vehicles that might be more tax-efficient for cross-border inheritance. I'd definitely recommend consulting with a tax professional who specializes in U.S.-Canada cross-border taxation before your parents pass away. The proactive planning could save significant taxes down the road.

I went through this exact situation when my Canadian father passed away two years ago. A few additional points that might help: 1. **Provincial vs Federal Canadian taxes matter**: Since your parents are in Ontario, be aware that Ontario has its own probate fees and tax rules that can affect the inheritance. The provincial withholding taxes on RRSP distributions can vary significantly. 2. **Consider the timing of RRSP rollovers**: If one parent predeceases the other, RRSPs can often be rolled over tax-free to the surviving spouse's RRSP/RRIF. This could delay the tax hit until the second parent passes away, potentially giving you more time to plan. 3. **Currency exchange implications**: Don't forget about currency fluctuations between inheritance and when you actually receive/convert the funds. This can create additional gains or losses for U.S. tax purposes. 4. **Estate planning with a cross-border attorney**: I wish I had done this earlier - having both parents' wills reviewed by someone familiar with both tax systems can prevent a lot of headaches. Some structures that work great in Canada can create unnecessary U.S. tax complications. The good news is that with proper planning (which it sounds like you're doing!), most of these issues can be managed effectively. The key is getting professional advice while there's still time to make strategic decisions.