Weekly Q&A

Q: I am a US resident and I just inherited a Registered Retirement Savings Plan (“RRSP”) from a Canadian resident.  Do I have to pay tax in Canada or in the US on the RRSP distribution?

A: Yes and no. 

As a named beneficiary of the inherited RRSP account, who is not the spouse of the deceased annuitant, the value of the RRSP at the time of death is taxed as income in the terminal Canadian tax return of the deceased.

This means that the value on the date of death will be distributed as capital and will not be subject to Canadian non-resident withholding tax.  However, if the distribution from the inherited RRSP has increased from the date of death, the increase in value will be taxable in Canada.  The increased value will be subject non-resident tax, not the entire distribution.  The non-resident withholding tax of 25% will be deducted from the distribution paid.  Please not that the statutory non-resident tax rate of 25% may be reduced to 15% under the U.S-Canada Income Tax Convention (1980).

Furthermore, as you are a resident of the US and have received an inheritance from a non-resident alien, the distribution is not taxable in the US.  However, you will likely have an information return due to report the distribution from a foreign estate is the amount exceeds a reporting threshold (i.e. Form 3520 “Annual Return to Report Transactions and Receipt of Certain Foreign Gifts”).

Finally, any income earned after the death of the individual, will be taxable in the US. However, you will be allowed to claim a foreign tax credit for US federal tax purposes, on Form 1116, in respect of the Canadian tax paid.  A foreign tax credit may or may not be allowed stateside.