Is an Inheritance from Canada Taxable in the U.S.?
American expatriates and relatives of Canadian citizens alike may wonder: will my Canadian inheritance be taxable in the United States? Knowing the protocol for receiving a foreign inheritance as an American citizen is important to avoid unnecessary penalties and fines.
If you receive an inheritance from Canada, it will, generally, not be taxable in the United States. In the U.S., some states do impose taxes on foreign inheritances. However, if you’re an established expatriate with permanent residency in another country, those laws will likely not affect you. Although your Canadian inheritance will not be taxable by the IRS, you may have to report it. Failure to do so can result in fines that can reduce the value of your inheritance.
The CPAs for American expatriates at US Tax Help can make receiving an inheritance from Canada easier. Our experienced accountants can tell you how to properly report your inheritance, so you avoid any penalties. Call the CPAs for American expatriates at US Tax Help at (541) 362-9127 or visit us online today to learn more about foreign inheritances.
Is My Inheritance from Canada Taxable in the U.S.?
Whether you’re an American expatriate living in Canada or have just received an inheritance from a Canadian relative, your inheritance may not be taxable in the United States. The IRS, or the Internal Revenue Service, generally doesn’t tax foreign inheritances. That being said, your previous state of residence might.
If you have permanent residence in Canada and have just received an inheritance from a Canadian relative, you may not be taxed on the funds. U.S. citizens are not taxed on foreign inheritances, including Canadian ones. That means that your inheritance will not be reduced by federal taxes. It is important to note that Canada’s laws may differ on this subject. Unlike the U.S., Canada has a residency-based taxation system. When American expatriates live outside of the country, it is important to familiarize themselves with their new country of residence’s tax laws and regulations.
Some states might impose a tax on an inheritance from Canada. However, say your permanent residence is in another country, like Canada. In that case, you will likely not be subject to a state inheritance tax. That being said, it is necessary to know whether or not your Canadian inheritance is vulnerable to state taxes.
That’s why it’s wise to have the guidance of an experienced accountant, like the CPAs for American expatriates at US Tax Help. For example, suppose you still retain property in your previous state of residence. In that case, you may have to adhere to that state’s tax code when you receive an inheritance from Canada. Anything tying you to your previous state of residence could prove residency, which might affect your Canadian inheritance.
Do I Have to Report a Non-Taxable Inheritance from Canada in the U.S.?
While your inheritance from Canada will not be taxed, especially if you are no longer a resident of an American state that imposes a tax on foreign inheritances, you may still have to report it to the IRS. When it comes to foreign inheritances, there is one main form to know. That’s IRS Form 3520, or the Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. You may also have to report your Canadian inheritance to the Financial Crimes Enforcement Network (FinCEN) if you intend to transfer funds to an American bank account.
IRS Reporting Requirements
American expats must complete an Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts if their Canadian inheritance exceeds $100,000. This is not for tax reasons but informational purposes. As long as you retain your American citizenship, the IRS maintains the right to know about your finances. Although you may have to report an inheritance from Canada to the IRS, it won’t be taxed.
In addition to IRS Form 3520, you may have other reporting requirements should your Canadian inheritance be substantial. Because there are various requirements for foreign inheritances, it’s best to consult an experienced professional, like the CPAs for American expatriates at US Tax Help. While the IRS will not tax an inheritance from Canada, you may have to complete IRS Form 8938, depending on the circumstances of your finances. The rules vary if expats are filing jointly or independently, which is why a certified public accountant can be helpful. Basically, IRS Form 8938 is a declaration of your foreign financial assets. Forms 3520 and 8938 are the most important IRS reporting requirements of receiving an inheritance from Canada.
FinCEN Reporting Requirements
Moving to Canada may mean that you are subject to certain financial agencies you’ve never heard of before, like the Financial Crimes Enforcement Network. FinCEN is an agency that monitors the movement of American money overseas. Though you won’t be taxed on your Canadian inheritance, you will likely have to complete FinCEN Form 104 if you intend to transfer it to an American bank account.
In addition to FinCEN Form 104, you may also have to complete Form 114. Now, if you’re an established American expatriate living in Canada, you may already be familiar with this reporting requirement. An FBAR, or a Report of Foreign Bank and Financial Accounts, is necessary if your aggregate foreign financial assets in Canada exceed $10,000. If the Canadian inheritance you’ve received will remain in a Canadian bank account and causes your foreign financial assets to be valued at over $10,000, you will be required to complete FinCEN Form 114.
Although the IRS doesn’t tax foreign inheritances, you will incur fines if you fail to report yours. Working with an experienced accountant, like the CPAs for American expatriates at US Tax Help, can help you avoid these penalties. Failure to properly report an inheritance from Canada can result in fines that lessen the value of your inheritance.
Our CPAs Can Tell You if an Inheritance from Canada is Taxable in the U.S.
If you’re unsure how to approach receiving an inheritance from Canada, our team of certified public accountants can help. To learn more about why inheritances from Canada are not taxable, call the CPAs for American expatriates at US Tax Help at (541) 362-9127, or visit our website today.