US Person Inheriting from a Canadian Estate: Tax Obligations on Both Sides of the Border

Canada has no estate tax and no inheritance tax. The US has an estate tax, but it applies to the estate of the decedent, not to the beneficiary’s receipt. When a US person inherits from a Canadian resident who has died, the Canadian estate handles the Canadian tax obligations (the final return, the deemed disposition of the deceased’s property), and the US beneficiary generally owes no US tax on the inheritance itself. But the US beneficiary does have reporting obligations, and the cost basis of the inherited assets requires careful handling to avoid double taxation.

What happens on the Canadian side when someone dies?

When a Canadian resident dies, the executor files a final T1 return (the “terminal return”) for the period from January 1 to the date of death. On this return, ITA 70(5) deems the deceased to have disposed of all capital property at FMV immediately before death. Capital gains are included in income on the terminal return and taxed at the deceased’s marginal rate.

Common property triggering deemed disposition on the terminal return:

• Non-registered investment accounts (stocks, bonds, mutual funds, ETFs): FMV minus ACB = capital gain.
• Rental or investment real estate in Canada: FMV minus ACB = capital gain. The principal residence may be exempt if designated.
• Private company shares: FMV minus ACB = capital gain. The lifetime capital gains exemption (LCGE, $1,250,000 for qualified small business corporation shares in 2025) may shelter some or all of the gain.
• Foreign real estate (a US vacation home): FMV minus ACB = capital gain.

What is NOT deemed disposed: Property transferred to a surviving spouse or common-law partner can roll over at the deceased’s ACB (no immediate tax) under ITA 70(6). RRSPs and RRIFs transferred to a surviving spouse can also roll over tax-free. Property held in a TFSA passes to the successor holder tax-free.

The estate pays the tax from the estate’s assets before distributing to beneficiaries. The beneficiaries receive their inheritance after the estate has settled its tax obligations.

What are the US beneficiary’s obligations?

A US person (citizen, green card holder, or US resident) who receives an inheritance from a Canadian estate has several obligations:

Form 3520 reporting: If the inheritance exceeds $100,000 in a calendar year, the beneficiary must report it on Form 3520, Part IV (Receipt of Certain Foreign Gifts and Bequests). The threshold is $100,000 from a single foreign person or estate. The reporting is informational; no US tax is owed on the inheritance.

The penalty for failing to file Form 3520 when required is 5% of the gross value of the inheritance for each month the report is late, up to 25%. For a $500,000 inheritance, the maximum penalty is $125,000. This penalty is disproportionately harsh relative to the zero-tax consequence, and reasonable cause relief is available.

No US income tax on the inheritance itself. Under IRC 102, gifts and inheritances are excluded from gross income. The US beneficiary does not include the inheritance in taxable income.

Cost basis of inherited assets. The US beneficiary’s cost basis in inherited capital property is generally the FMV at the date of death under IRC 1014. This “stepped-up basis” means that when the beneficiary eventually sells the property, they pay US capital gains tax only on the appreciation after the date of death, not on the gain that accrued during the deceased’s lifetime.

This stepped-up basis aligns with the Canadian deemed disposition at FMV on death, which means the gain that accrued during the deceased’s lifetime is taxed once (by Canada, on the terminal return) and not again (by the US, because the US basis is stepped up to FMV). This coordination prevents double taxation in most cases.

What about Canadian real estate inherited by a US person?

When a US person inherits Canadian real estate, additional considerations apply:

Canadian non-resident withholding on sale: When the US beneficiary eventually sells the Canadian real estate, they are selling as a non-resident of Canada. Section 116 of the ITA requires the buyer (or the buyer’s lawyer) to withhold 25% of the gross sale price unless the non-resident seller obtains a clearance certificate from the CRA (Form T2062, Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property). The clearance certificate process takes 4 to 12 weeks, and the CRA may require a deposit of the estimated tax.

US reporting of the sale: The US beneficiary reports the sale on Schedule D and Form 8949 of their US return. The gain is the sale price minus the stepped-up basis (FMV at date of death). A foreign tax credit is available for the Canadian tax paid on the sale.

No FIRPTA on Canadian real estate. FIRPTA (Foreign Investment in Real Property Tax Act) applies to sales of US real property by foreign persons. It does not apply to Canadian real estate. The US taxes the US beneficiary on the gain as a US person selling foreign property, with a foreign tax credit for the Canadian tax.

What about RRSP and RRIF assets inherited by a US person?

When a Canadian dies and the RRSP or RRIF does not roll over to a surviving spouse, the full balance is included in the deceased’s income on the terminal return (taxed at the marginal rate, which can be over 50%).

If the US beneficiary receives the RRSP/RRIF distribution as part of the estate settlement, the distribution may also be subject to Canadian non-resident withholding tax (25%, reduced to 15% by the treaty for periodic payments).

On the US side, the distribution is excluded from income under IRC 102 (it is part of the inheritance). The beneficiary does not owe US tax on the RRSP/RRIF amount received from the estate. However, if the RRSP/RRIF is not liquidated as part of the estate settlement and instead continues as a beneficiary RRSP or RRIF (possible in some circumstances), the US tax treatment becomes more complex, and the US beneficiary may need to report the account on the FBAR and Form 8938.

What about the principal residence?

If the deceased Canadian’s principal residence passes to a US beneficiary, the principal residence exemption (PRE) can shelter the gain on the terminal return. The executor designates the property as the deceased’s principal residence for the years of ownership, and the gain is exempt from Canadian tax under ITA 40(2)(b).

The US beneficiary’s cost basis is the FMV at death (stepped up under IRC 1014). If the beneficiary sells the property, the Canadian PRE does not apply to the post-death gain (the beneficiary is not a Canadian resident and did not use the property as their principal residence). The post-death gain is subject to Canadian tax under Section 116 (non-resident selling TCP) and US tax (with a foreign tax credit for the Canadian tax).

If the US beneficiary keeps the property and uses it as a personal residence for 2 of the 5 years before sale, the US home sale exclusion under IRC 121 ($250,000 single, $500,000 married) may apply to the US gain. But the Canadian Section 116 tax still applies.

What forms are involved?

Canadian side (filed by the estate):

• T1 terminal return (final return of the deceased)
• T3 trust return (if the estate earns income after the date of death)
• T2062 clearance certificate (if Canadian real property is sold by the estate or a non-resident beneficiary)

US side (filed by the beneficiary):

• Form 3520, Part IV (reporting inheritance from a foreign estate, if over $100,000)
• FBAR (FinCEN 114) (if the beneficiary has a financial interest in or signature authority over foreign financial accounts exceeding $10,000 at any point during the year)
• Form 8938 (if foreign financial assets exceed the reporting threshold)
• Schedule D / Form 8949 (when inherited assets are eventually sold)

Related guides:

• Deemed Disposition at Death: Canada vs US Step-Up in Basis covers how Canada’s deemed sale on death interacts with the US stepped-up basis rule
• Form 3520 Penalty Abatement covers the IRS policy shift on reasonable cause relief for late or missed Form 3520 filings
• FBAR Filing Requirements covers who must file FinCEN 114 and the $10,000 aggregate threshold
• Form 8938 Filing Thresholds covers FATCA reporting for specified foreign financial assets
• US Estate Tax for Canadians covers how US estate tax applies when a Canadian owns US situs property
• US Tax on Inheritance or Gift from a Canadian Parent covers the US reporting rules when a US person receives a gift or bequest from a Canadian relative
• Cross-Border Estate Planning: Freezes, Alter Ego, and Bypass Trusts covers planning structures that coordinate Canadian and US estate treatment

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.