Receiving Canadian Inheritances as a U.S. Resident

Many Canadians who live in the U.S. will eventually inherit assets from Canadian parents, but few realize that this can trigger important tax and reporting implications. Although Canada does not impose an inheritance tax, complying with U.S. tax laws is critical to avoiding severe penalties and optimizing your inheritance.

Understanding the Canadian Side of the Inheritance

In Canada, there is no estate tax. Instead, Canadian tax law applies a “deemed disposition” which treats the deceased person’s assets as if they were sold at fair market value upon death – therefore taxing all previously unrealized capital gains on the deceased’s terminal return. The estate’s executor must settle any taxes owed before distributing the inheritance, typically resolving all Canadian tax obligations before the assets reach U.S. beneficiaries.

It is important to point out that there can be exceptions to this deemed disposition, notably the spousal rollover which defers taxation when assets pass directly to a surviving spouse.

U.S. Tax Implications for the Beneficiary

The IRS does not directly impose inheritance taxes, however estates valued above $13.99M USD (as of 2025) may face an estate tax of up to 40%. Some states also levy their own state-level estate tax with their own state-specific exemption level which may be different from the federal estate tax exemption amount.

 Additionally, certain states (including Pennsylvania, Nebraska, Kentucky, Iowa, Maryland, and New Jersey) may levy inheritance taxes depending on your relationship to the deceased, the types of assets inherited, and the asset’s location.

Depending on the value of your inheritance and the types of assets received, the IRS may require reporting disclosures through specific forms. 

Currency Exchange Considerations

Since your inheritance is coming from Canada, the IRS requires you to report the amount in USD using the exchange rate on the date you receive the funds, meaning that currency fluctuations could impact your reporting obligations. For substantial inheritances in CAD, we recommend working with a cross-border portfolio manager like MCA Cross Border Advisors to optimize your net worth through customized currency strategies.

 Planning for Foreign Inheritances

To optimize your inheritance and simplify your tax situation, here are some key points to consider:

• Liquidate PFICs Before Distribution: Under U.S. tax law, Passive Foreign Investment Companies (PFICs) – such as Canadian ETFs, mutual funds, and REITs – carry punitive tax rates and burdensome reporting requirements. Having the estate’s executor liquidate these investments prior to distribution can significantly simplify your U.S. tax situation.
• Step-up in Basis for Capital Assets: U.S. tax law adjusts the cost basis of inherited capital assets (such as real estate, stocks, and bonds) to fair market value on the date of death, reducing your future capital gains tax when the assets are eventually sold.
• Encourage the Grantor to Realize Gains during Life: Since Canada taxes all unrealized gains immediately upon death, encouraging the grantor to realize some gains over several years prior to death may reduce the estate’s overall tax burden, ultimately benefiting the beneficiaries with greater after-tax inheritances.
• Utilize Trust Strategies: Establishing a U.S.-based trust can streamline the inheritance process, simplify cross-border estate administration, and potentially reduce your future estate tax exposure. Trust strategies should only be implemented with the support of a professional, and the appropriate trust structure will depend on your specific estate planning goals and the types of inherited assets.
• Addressing Canadian Non-Resident Withholding Taxes: Beneficiaries may face a 25% CRA non-resident withholding tax on withdrawals from inherited RRSPs / RRIFs and TFSAs – only on the post-death growth portion. This post-death appreciation within these accounts is considered taxable Canadian-source income for the non-resident beneficiary (rather than the estate) and must be reported accordingly.

Avoiding Common Pitfalls

To ensure compliance and avoid unnecessary penalties, keep these key points in mind:

• Report all required forms (3520, 8938, FBAR) on time.
• Avoid holding PFICs as a U.S. resident.
• Be aware of state-level inheritance taxes where applicable.
• Work with a cross-border tax expert to develop tax-efficient strategies.

Conclusion

Receiving a Canadian inheritance as a U.S. resident presents unique opportunities along with important responsibilities. Although inheritances typically are not directly taxed by the IRS, carefully navigating reporting requirements and proactively planning your strategy is essential to avoiding steep penalties. Working with a multidisciplinary team of cross-border experts, such as MCA Cross Border Advisors, can help you optimize your inheritance, simplify compliance, and avoid costly errors. For personalized guidance tailored to your situation, please reach out to schedule a consultation.