Are you a Canadian citizen inheriting an IRA account while living in Canada? You must carefully consider the tax implications of inheriting US-based assets.
Our cross-border advisors are licensed in Canada and the U.S. and can manage IRAs on both sides of the border.
Are you inheriting an IRA while living in Canada?
U.S. firms usually cannot manage Individual Retirement Accounts (IRA) for Canadian beneficiaries who are non-U.S. residents.
The U.S. firm may request Canadian beneficiaries to:
Transfer the assets: The Canadian beneficiary can transfer the IRA to a firm eligible to manage IRAs for Canadian residents.
Liquidate/cash-out the IRA: Alternatively, the U.S. firm may provide notice before liquidating the IRA accounts. This action can result in significant tax implications for the Canadian beneficiary.
Our team can help manage the inherited IRA account for the Canadian beneficiary to ensure compliance with regulations and minimize tax consequences.
Tax Implications 0f Inheriting an IRA in Canada
If you live in Canada and inherit an IRA as a non-U.S. citizen beneficiary, the distributions paid from that IRA are subject to Canadian taxation. The distribution is subject to 15% withholding tax in the U.S. This lower U.S. rate applies only if the appropriate forms are filed with the U.S. Internal Revenue Service (IRS). The standard withholding rate is 30%, but under the Canada-U.S. Tax Treaty, this rate may be reduced to 15%.
Our team can assist you with completing and submitting these documents.
Distributions from the inherited IRA must be included in the Canadian beneficiary’s income in Canada. As a result, you must report the inherited IRA distribution on your Canadian income tax return.
You can claim the foreign tax credit for the taxes paid to the U.S.
Inherited IRA Distribution Types
Lump Sum Distribution
You can withdraw the entire inherited IRA account. You can choose to receive it all at once, at any time. Withdrawing the entire inherited IRA can trigger higher tax, including a 30% U.S. withholding tax. You can spread or defer withdrawals over a period to lower the tax burden in Canada and the U.S.
10 Year Distribution Rule
Are you inheriting an IRA from someone who passed away on or after January 1, 2020? You are generally subject to the 10-year distribution rule. This means you can enjoy tax-deferred growth of the inherited IRA account for 10 years. You must completely liquidate the account by December 31 of the 10th year after the year of the original IRA owner’s death. You may spread the withdrawals over the 10-year period to reduce taxes paid in Canada and the U.S.
Surviving Spouse Acts As The Sole Beneficiary
The 10-year distribution rule does not apply when the spouse is the sole beneficiary.
If the IRA owner died before they were required to start taking required minimum distributions (RMDs), the surviving spouse would need to start taking RMDs when the owner would have reached age 72 (or age 70.5 if they died prior to 2020). In this case, the funds can continue to grow without distributions until that time.
If the IRA owner died after they were already taking RMDs, then the surviving spouse must take any remaining RMDs for the year of the IRA owner’s death by December 31st. RMDs for the survivor begin by December 31st of the year following the year of the IRA owner’s death.
If the spouse is the sole primary beneficiary, they can transfer the inherited IRA assets into their own IRA. When inheriting an IRA, the spouse can then treat these assets as their own.
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Frequently Asked Questions
A U.S. firm is generally not eligible to continue to hold or manage an IRA for a Canadian beneficiary because of regulatory restrictions that apply to non-U.S. residents. The firm will usually request the beneficiary to either transfer the assets to an eligible firm that can hold IRAs for Canadian residents or receive notice before the account is liquidated.
For both Canadian and US tax purposes, the funds grow tax deferred until actual distribution. Cashing out everything re-investing in a non-registered account would result in triggering tax on the withdrawal and annual tax on the generated income in the non-reg account.
The distribution amount paid from the inherited IRA is taxable in Canada and subject to a 15% withholding tax in the U.S. (provided appropriate documents are filed with the IRS). The beneficiary must report the distribution on their Canadian income tax return and can claim a foreign tax credit for taxes paid to the U.S.
If the beneficiary is a Canadian resident who is a U.S. citizen or green-card holder is not subject to 15% withholding, rather generally 10% for U.S. persons in Canada.
Keep in mind that the 15% withholding tax is for periodic distributions. The statutory 30% rate applies for non-periodic distributions.
A Canadian non-eligible designated beneficiary can choose a lump sum distribution, which exposes them to significant tax consequences including a possible 30% U.S. withholding tax, or use the 10-year distribution rule (if the IRA owner died on or after January 1, 2020), allowing them to spread withdrawals over 10 years to reduce tax burdens in both Canada and the U.S.
In addition, starting in 2025, non-eligible designated beneficiaries (most non-spouse beneficiaries who do not qualify as eligible designated beneficiaries) who inherited IRAs for deaths on January 1, 2020 and onwards, are also subject to RMDs. This means they are subject to both RMDs (starting 2025) and the 10-year rule—not only the 10-year rule.
Under the 10-year distribution rule, the beneficiary can enjoy tax-deferred growth of the inherited IRA account for 10 years but must completely liquidate the account by December 31 of the 10th year after the original IRA owner’s death. Withdrawals can be spread over this period to reduce taxes paid in Canada and the U.S.
In addition, starting in 2025, non-eligible designated beneficiaries (most non-spouse beneficiaries who do not qualify as eligible designated beneficiaries) who inherited IRAs for deaths on January 1, 2020 and onwards, are also subject to RMDs. This means they are subject to both RMDs (starting 2025) and the 10-year rule—not only the 10-year rule.
If the sole beneficiary is the surviving spouse, the 10-year distribution rule does not apply. The surviving spouse must start taking required minimum distributions (RMDs) either when the deceased owner would have reached age 72 (or 70.5 if death occurred before 2020) or, if the owner was already taking RMDs, by December 31st of the year after the owner’s death. The spouse can also transfer the inherited IRA assets into their own IRA and treat them as their own.
The U.S. firm may provide notice before liquidating the IRA account. However, this approach could result in significant tax implications for the Canadian beneficiary.
Cross-border financial advisors can help manage the inherited IRA account for the Canadian beneficiary to ensure compliance with regulations and minimize tax consequences, and they can facilitate transferring assets to an eligible firm.
The Canadian beneficiary must include the inherited IRA distributions in their income in Canada and report them on their Canadian income tax return.
Spreading withdrawals over a period of time, such as under the 10-year distribution rule, may reduce the tax burden in both Canada and the U.S. compared to taking a lump sum distribution.
Starting in 2025 and onwards, non-eligible designated beneficiaries do not have the option to wait until year 10 to make any distributions. They have to start taking RMDs too. Just taking annual RMDs (just the minimum) however likely will not deplete the account by year 10.
If the surviving spouse is the sole primary beneficiary, they have the option to transfer the inherited IRA assets into their own IRA and consider them as their own.