Non-resident inheriting from a Canadian estate: tax and withholding

Do I pay Canadian tax on an inheritance if I live abroad?

Not on the inheritance itself. Canada has no inheritance tax: receiving your share of what the deceased owned is not taxed in Canada. Tax can still reach you on income the estate earns after death, on part of a registered plan, and on a later sale of property you inherit. The tax mostly falls on the deceased and the estate:

• The deceased's final return. At death, the person is treated as selling their capital property at fair market value, and the gain goes on the final return (Income Tax Act, s. 70(5)). See taxes when someone dies for that return.
• The estate's income after death. Interest, dividends, rent and other income the estate earns while the executor wraps things up are taxed in the estate, or, when paid to a beneficiary, to the beneficiary.
• You, as a non-resident. Estate income paid or credited to you is subject to Part XIII tax, the flat non-resident tax a Canadian payer takes off a payment before sending it abroad. The rate is 25% unless a tax treaty lowers it (s. 212(1)(c); T4061).

What makes a case not simple: an RRSP or RRIF named to you, a Canadian house or rental you keep or sell, an executor who also lives abroad, missing past returns for the deceased, and the tax rules of the country where you live, which may tax or require reporting of the inheritance on their own.

Gather: the will, the executor's contact details, your country of tax residence and foreign tax number, any Canadian SIN or other Canadian tax number you hold, a list of what you are inheriting (cash, investments, RRSP, RRIF or TFSA, real estate), the beneficiary designation on any registered account, whether you were financially dependent on the deceased, and any NR4 or T4RSP slips the estate or a financial institution sends you.

What will the executor withhold from my share, and why?

The executor withholds Part XIII tax on the estate's income paid or credited to you, not on your share of what the deceased owned. Section 212(1)(c) taxes estate income to the extent it is included in your income under the trust rules. Your share of capital, such as the deceased's cash, home or investments already taxed on the final return, is not estate income.

Two rules make the line between capital and income matter:

• How the executor labels a payment matters. For Part XIII purposes, what an estate pays or credits to a beneficiary is deemed paid as estate income "regardless of the source" (s. 212(11); IC76-12R8, para. 36). So even interest that would be exempt if a bank paid it to you directly is taxed when it comes through the estate. The capital part is still not taxed, but only if the executor's records show which part of each payment is capital and which is income.
• Treaty rates are narrower here. The CRA says a lower rate applies to amounts an estate pays a non-resident beneficiary only if the tax treaty specifically provides for it (IC76-12R8, para. 36). Check your country's treaty on non-resident tax rates in Canada.

An executor who fails to withhold is liable for the tax even if it cannot be recovered from you (T4061). So an executor may withhold the full rate until the records show what is capital and you show you qualify for a treaty rate.

Will I get an NR4 slip, and do I file a Canadian return for it?

Yes, if the estate pays or credits you Part XIII income of $50 or more, it issues you an NR4 slip, even where no tax had to be withheld. Estate or trust income uses income code 11. The estate's NR4 return is due no later than 90 days after the end of the estate's or trust's tax year (T4061). The estate also files a T3 return in a year it allocates income to a non-resident beneficiary (T3 Trust Guide).

In general, Part XIII tax withheld is your final Canadian tax on that income, and you do not put it on a Canadian return (T4058). Estate income is not among the types a non-resident can elect to report on a section 217 return. If too much was withheld, for example the full rate when your treaty allows less, you can ask the CRA in writing for a refund within 2 years after the end of the calendar year the tax was paid (s. 227(6)). Keep the NR4: your own country may want the income reported and may give a credit for the Canadian tax. What each box shows is on the NR4 slip guide.

I inherit an RRSP or RRIF as a non-resident: how is the payout taxed?

It depends on who you are to the deceased. When the beneficiary is not a spouse, common-law partner or financially dependent child or grandchild, the full value of the RRSP at death goes on the deceased's final return. The beneficiary is taxed only on income the plan earns after death (RC4177); RRIFs follow the same pattern (RC4178). A resident beneficiary sees that income on a T4RSP or T4RIF; a non-resident gets an NR4 showing the amount and the Part XIII tax withheld (T4061).

For a non-resident beneficiary, Part XIII applies to RRSP and RRIF payments only to the extent they would be the beneficiary's income if the beneficiary lived in Canada (s. 212(1)(l) and (q)). So:

If the plan issuer withholds on more than the part taxed to you, ask which amount and NR4 income code it used, and see the refund rule in the NR4 section above.

Two traps:

• You can be on the hook for the deceased's tax. The beneficiary who received the plan is jointly liable with the estate for the tax the RRSP or RRIF added to the final return (s. 160.2), and the CRA can assess it at any time; in practice it turns to you when the estate does not pay.
• Section 217 may lower the tax. RRSP and RRIF payments are among the incomes a non-resident can report on a section 217 return to recover some withholding (T4058). See section 217 returns.

A US citizen or resident has more to report on the US side; see inheriting a Canadian RRSP, RRIF or TFSA as a US person.

I inherit a Canadian house or rental: what happens if I keep it, rent it or sell it?

Keeping it triggers no Canadian tax by itself; renting it means withholding on the rent; selling it needs a section 116 notice, and you are taxed only on the rise in value after death. You take the property at its fair market value at death (s. 70(5)(b)). Any rise in value after that is your own gain when you sell. The gain up to death belongs on the deceased's final return.

Real estate in Canada is taxable Canadian property, which is why a non-resident's sale goes through the section 116 process (IC72-17R6). If the estate sells the property before distributing it, the gain after death is the estate's: taxed in the estate if kept, or Part XIII estate income to you if paid out. An estate that is no longer a graduated rate estate (at the latest, 36 months after the death) and pays such a gain, or rent, to a non-resident beneficiary also owes Part XII.2 tax (s. 210.2; s. 210(2)).

Why is the executor waiting for a clearance certificate before paying me?

Because an executor who pays you before the CRA confirms the estate's taxes are settled can be personally liable for them. A clearance certificate is that confirmation: the estate has paid all income tax and GST/HST, interest and penalties it owes. An executor who distributes property without one is "personally liable for unpaid amounts, up to the value of the amount of assets distributed" (CRA). The CRA issues it only after the required returns are filed and assessed and the balance is paid or secured, so the wait can be long. It protects you too: a beneficiary who receives estate property while tax is unpaid can be assessed, at any time, for that tax up to the value received (s. 160).

The executor asks for it on Form TX19, with a list of the beneficiaries who receive property other than cash and their tax numbers, and may pay part of the estate early if enough is kept back to cover what the CRA could still assess (T3 Trust Guide). The steps are on taxes when someone dies.

Does a non-resident executor change anything for the estate?

It can. The CRA considers an estate or trust to reside where its real business is carried on, and the residence of the executor "does not always determine" it (T3 Trust Guide). If executors abroad make the key decisions, the estate's own residence becomes a question, and that changes who withholds and who files. A non-resident executor still has to file the deceased's final return, get the clearance certificate and handle any section 116 sale. Where the estate resides depends on who makes its decisions and where; the T3 Trust Guide gives no bright-line test.

What should I send the executor?

Send what lets the executor apply the right rate and file the slips:

1. Proof you are treaty-eligible. Form NR301 is the usual way to show you are resident in a treaty country and entitled to its rate. Without enough information, the executor should apply the full rate (IC76-12R8, paras. 12 and 19).
2. Your permanent home address abroad, not a Canadian mailing address.
3. Your foreign tax identification number, which goes in box 30 of the NR4 (T4061).
4. Your Canadian SIN or other Canadian tax number, if you have one; the clearance request lists the tax number of each beneficiary who receives property other than cash.
5. Instructions for payment. Getting the money to an account abroad is covered in moving your money out of Canada.

If the estate holds a living family trust interest for you, that is a different set of rules; see family trust beneficiaries moving abroad. Reporting an inheritance on a US return is covered in gifts and inheritances from abroad.

Example

All figures are illustrative, in Canadian dollars.

Son in Singapore inherits half of an Ontario estate

A C$900,000 estate is split between two children. The executor sells the investments, and the final return pays the tax on the gains up to death. A year later, after the clearance certificate, the executor pays the son C$400,000 of capital, his half after the final return's tax and estate costs: no Part XIII tax. Separately, the estate earned C$20,000 of interest after death and paid it to him. That C$20,000 draws Part XIII withholding at 25% or the treaty rate, and he gets an NR4 slip with income code 11.

Daughter in the UK is named on her mother's RRIF

The RRIF is worth C$150,000 at death. The daughter is an adult and not dependent, so the C$150,000 goes on her mother's final return. The plan earns C$3,000 before it pays out. Under the rules for a non-dependent adult child, only that C$3,000 is the daughter's income, so Part XIII withholding applies to it at 25% or the UK treaty rate. If the estate cannot pay the tax the RRIF added, the CRA can collect that share from her.

Two siblings abroad inherit a Vancouver condo

The condo is worth C$700,000 at death; the gain to that date is taxed on the parent's final return. The siblings keep it a year and sell for C$740,000. Each sibling notifies the CRA under section 116 and reports half of the C$40,000 gain on a Canadian non-resident return. Without a certificate, the buyer holds back part of the price until the CRA is satisfied.

Different for you?

• The deceased had missed returns, or the final return is not filed. The clearance certificate waits on them; see taxes when someone dies and individual tax help.
• You inherit a house or rental to keep, rent or sell. Section 116, rent withholding and a non-resident return all apply; see non-residents selling Canadian property, non-resident landlords and individual tax help.
• An RRSP or RRIF is named to you. Whether you or the deceased is taxed, and whether a section 217 return helps, decides the cost; see section 217 returns and individual tax help.
• You are the executor and you live abroad. The estate's residence and your personal liability are at stake; see individual tax help.
• The executor or plan issuer withheld the full rate, or withheld on capital. A written refund claim to the CRA has a time limit; see the NR4 slip guide and individual tax help.
• You must file in Canada for other income or missed years. See non-resident returns and catch-up and individual tax help.
• You live in the US. The inheritance may need US reporting; see gifts and inheritances from abroad and cross-border tax help.