Inheriting a Parent’s RRSP, RRIF or TFSA as a US Citizen

Who pays Canadian tax on my parent’s RRSP, RRIF or TFSA?

Generally the estate pays, not you. For a financially independent child, Canada adds the RRSP or RRIF value at death to your parent’s final return, which the executor files. A TFSA’s value at death is generally not taxed to you in Canada. You can still be taxed on growth after death and be jointly liable for part of the retirement-plan tax. This assumes your parent lived in Canada at death and you are not a spouse or financially dependent child.

Sources: CRA on the RRSP, RRIF and TFSA at death.

A person who receives plan money directly can be liable for part of the parent’s tax. Under section 160.2, anyone other than the annuitant who receives an amount out of an RRSP or RRIF is jointly liable with the deceased for the share of the final-year tax that the deemed receipt caused, in proportion to the amount received. The CRA can collect it from either, and can assess you at any time (section 160.2(3)).

An executor who distributes estate property before getting a CRA clearance certificate is personally liable for the deceased’s unpaid tax, up to the value distributed (section 159). For the executor’s return and clearance, see Taxes when someone dies.

Is tax withheld in Canada if I live in the US, or in Canada?

If you live outside Canada, yes: non-resident withholding applies to amounts taxable to you, such as TFSA payments above the value at death. The default rate on amounts subject to Part XIII tax is 25%. A treaty can reduce it, but the reduced limit is for periodic pension payments, and a lump-sum inheritance does not automatically qualify (Article XVIII(2)). The NR4 guide gives no separate rate for an RRSP or RRIF death payout and sends questions on non-resident RRIF payments to the CRA.

If you live in Canada, growth after death and any TFSA payment above the value at death go on your own Canadian return; the US side is in Americans living in Canada. Residence for Canadian tax turns on where you normally live and your ties to Canada (CRA).

CRA says an RRSP or RRIF amount reasonably regarded as already included in the deceased’s income is not taxed again to the beneficiary (RRSP, RRIF). Part XIII tax on an RRSP or RRIF payment reaches only an amount that would be income if you lived in Canada (section 212(1)(l) and (q)).

If tax was withheld from RRSP or RRIF payments to you as a non-resident, you may be able to elect to be taxed on a Canadian return instead, filed within 6 months after the year ends (section 217); see Non-resident return for pension and RRSP income.

What happens to TFSA growth after my parent dies?

Up to the value at death, the TFSA passes to a designated beneficiary tax-free in Canada. Growth after death is not automatically tax-free; it depends on the TFSA’s type, which the issuer or your parent’s legal representative can tell you (CRA). A child named as beneficiary is a designated beneficiary, not a successor holder; only a spouse or common-law partner can be one (Income Tax Act, section 146.2(1), CRA).

For a trust TFSA, the exempt period ends when the trust ceases to exist or at the end of the first calendar year that begins after the holder dies, whichever is earlier: a March death gives an exempt period to December 31 of the next year (section 146.2(9)).

A non-resident beneficiary’s payments above the value at death get an NR4 slip (CRA). Quebec does not recognize beneficiary designations for deposit or trust TFSAs, so check the contract and will.

Is the payout taxable US income or a tax-free inheritance?

IRS guidance does not directly say how an heir is taxed on every foreign registered-plan payout, so neither excluding all of it nor reporting all of it as income can be assumed correct.

The IRS generally excludes inherited property from income, but income in respect of a decedent and earnings produced by inherited property are separate (Publication 559). For an RRSP or RRIF, Revenue Procedure 2014-55, section 6 directs including distributions in income under the section 72 rules, subject to treaty provisions. That is a distribution rule, not an heir-specific calculation.

Two questions need review:

• Does the payout include money your parent had earned but not yet reported as income at death? The tax term is income in respect of a decedent: gross income the deceased was entitled to that was not properly includible in the deceased’s taxable income for the year of death or earlier (26 CFR 1.691(a)-1). Publication 559 and the regulation do not classify an inherited foreign plan.
• Does treaty relief apply? If you live in the US, Article XVIII(1) exempts a pension amount arising in Canada that Canada would exclude from taxable income if you were a Canadian resident. If you live in Canada, the payment is not cross-border and it does not apply; a US citizen living in Canada may be a resident of both countries, and Article IV(2) breaks the tie, starting with a permanent home. Whether your death payout qualifies requires analysis (Treaty).

For a TFSA, the US result depends on whether you received inherited assets, an estate distribution or a foreign-trust distribution; the inheritance exclusion does not resolve every trust payment (CRA: TFSA types).

Do I file Form 3520, and when is it due?

Possibly. The payment’s legal source decides which part of the form applies, and the RRSP and RRIF exception is written as foreign-trust relief.

Form 8891, the old RRSP and RRIF form, is obsolete (Revenue Procedure 2014-55, sections 5.02 and 8).

For a calendar-year individual, Form 3520 is due April 15 after the receipt year. June 15 applies if, on your return’s due date, you live outside the US and Puerto Rico and your place of business or post of duty is also outside them, or you are in qualifying military service abroad; attach a statement. A retired heir in Canada with no job there may not meet that second part. With an income tax filing extension, the date is no later than October 15 (instructions). The filing address is in Gifts and inheritances from abroad.

Does a spouse’s rollover or successor account keep US tax deferral?

A spouse or common-law partner, and sometimes a financially dependent child or grandchild, can move an RRSP or RRIF into their own plan, so the tax does not stay on the parent’s final return; CRA’s dependent test looks at living with the annuitant and income, not only support (CRA). If the plan pays the estate, the executor and the survivor jointly sign Form T2019 (RRSP) or Form T1090 (RRIF, CRA); the survivor’s transfer is due in the year received or within 60 days after the end of the year. A Quebec parent’s plan also has Revenu Québec forms: TP-930-V (RRSP) and TP-961.8-V (RRIF).

Only a spouse or common-law partner can be a TFSA successor holder. A spouse who is only a beneficiary can put the payout into their own TFSA as an exempt contribution made by December 31 of the year after the holder's death, filing Form RC240 within 30 days of the contribution (CRA). A financially independent child is paid out instead. If you keep a plan, US deferral has its own test: a Canadian rollover alone does not establish it.

The deferral rests on Article XVIII(7) of the treaty, which Revenue Procedure 2014-55 applies to RRSPs and RRIFs. Its definition of beneficiary (section 3) covers someone who holds an interest in the plan and would otherwise be taxed currently on growth not yet paid out. It does not say whether a person named on a death-beneficiary form qualifies, so eligibility for an inherited plan is unsettled. The eligibility test and election rules are in Canadian registered accounts on a US return.

A successor holder spouse keeps the TFSA’s Canadian shelter, including later earnings; that does not establish US retirement-plan deferral for a TFSA (CRA, Revenue Procedure 2014-55, scope).

Do I report the account on the FBAR and Form 8938?

An inherited account or plan interest can create foreign-asset reporting even when the payment is not taxable. The FBAR is FinCEN Form 114, the Report of Foreign Bank and Financial Accounts. Check when you obtained ownership, a reportable interest or signature authority; being a beneficiary does not mean you owned every account.

The retirement-plan reporting relief does not remove FBAR or Form 8938 duties (Revenue Procedure 2014-55, section 5.01). The FBAR test looks at any time during the calendar year, so closing the account before year-end does not erase an earlier obligation. Thresholds and filing comparison: Foreign account reporting.

What cost do I use for inherited investments?

This matters only if investments were transferred to you in kind; if you were paid in cash, go to the next section. Cost, called tax basis, is the amount used to work out a later gain or loss.

Value at death may not be the US cost of investments that come out of a registered plan. Ordinary inherited property generally takes its date-of-death fair market value as basis, but section 1014 does not apply to a right to receive income in respect of a decedent (26 CFR 1.1014-1(c), Publication 559). Neither says whether a registered plan’s payout is that kind of right. An in-kind payout needs its own determination of value and basis; the Canadian final-return inclusion does not establish US basis.

Can I claim a US credit for Canadian tax the estate paid?

Canadian tax on your parent’s final return is not automatically your US foreign tax credit. The IRS generally requires a qualifying tax imposed on you, paid or accrued by you, and equal to the legal foreign liability (IRS). Identify whose tax was paid, which income it covered, and when. Withholding on your own taxable post-death income may have a different result from tax on the amount Canada treats your parent as having received at death.

One exception to check: for income in respect of a decedent, an heir who receives it subject to foreign income tax imposed on the decedent, where the tax must be satisfied out of the income, gets the credit when the heir pays the tax (26 CFR 1.691(b)-1, Publication 559). Neither says whether Canadian tax on the amount treated as received at death fits, or whether tax you pay under the beneficiary-liability rule counts. Bring any CRA assessment and payment records to cross-border tax review.

Treaty Article XXIX B(7) is an estate-level credit against US estate tax for a US citizen or resident decedent, not a credit on your Form 1116 (Treaty). See Final returns when a US citizen dies in Canada.

Which slips and records should I keep?

Keep records that separate the inherited value, later income and each taxpayer’s tax. A net bank deposit cannot establish all three.

I already received the money and filed nothing. What now?

First classify the receipt and reconstruct the account history: missing income, a missing foreign-bequest form and a missing account report may need different corrections. Gather the records above, work out the US income treatment and whether Form 3520, FBAR or Form 8938 applied, and review prior filings and the correction procedure before submitting late forms.

A late Part IV report of a foreign bequest carries a penalty of 5% of the amount for each month, up to 25%. A missed Part III foreign-trust distribution report starts at the greater of US$10,000 or 35% of the distribution and keeps the assessment period open until 3 years after the required information is reported. Reasonable cause can excuse either, and a penalty can apply even when the payment was not taxable (instructions). See Missed FBAR or TFSA forms after filing US returns.

Example

Illustrative only. All amounts are Canadian dollars; no tax rate or US result is assumed.

A Canadian-resident parent dies with an RRSP that has not started annuity payments, worth C$200,000, and a trust TFSA worth C$50,000. The financially independent adult child is a US citizen living in Seattle. Both accounts pay the child during the following calendar year, after the RRSP grows to C$210,000 and the TFSA grows to C$52,000.

• Year of death: the parent’s final return generally includes the RRSP’s C$200,000 value at death (T4RSP box 34, in the parent’s name). Section 160.2 can make the child jointly liable for the tax that C$200,000 caused, in proportion to the amount received: all of it as the only payee, half if two equal payees share the RRSP.
• Following year: the child is paid C$210,000 and C$52,000. The C$10,000 RRSP growth needs separate recipient reporting and a non-resident withholding review. The TFSA’s C$50,000 value at death generally passes without Canadian income tax; the C$2,000 excess paid during the trust’s exempt period is subject to non-resident withholding.
• The child obtains a US classification of each receipt and checks inheritance and account reporting using US-dollar values. The parent’s Canadian tax payment is not assumed to create the child’s US credit.

Different for you?

• The payout’s US classification is unclear, or your qualifying foreign bequest exceeds US$100,000: bring the will, contracts, slips and values to cross-border tax review.
• You inherit as a spouse, successor holder or financially dependent child: check Canadian transfers and US deferral together before funds move. See cross-border tax.
• Your parent was also a US citizen or green card holder: US estate tax, a US final return and treaty credits can apply to the estate. See Final returns when a US citizen dies in Canada and Settling an estate across the border.
• Your parent lived outside Canada at death, for example in the US: the Canadian rules above assume a Canadian-resident parent. Bring the plan statements and death date to cross-border tax review.
• The estate also includes a home, shares or other property, or you are the executor: see Taxes when someone dies for the Canadian side and Gifts and inheritances from abroad for US reporting and cost.
• You live in Canada as a US citizen: see Americans living in Canada.
• You inherited a US IRA or employer retirement account while living in Canada: see Inheriting a US retirement account in Canada.