Do I pay US tax on an inheritance or gift from my Canadian parent?

Not as income. US law excludes gifts and inheritances from gross income, so an ordinary inheritance from a Canadian parent isn’t income to you. One transfer tax can reach a recipient, and it takes a US citizen or resident on the receiving end and a covered expatriate on the giving end, so check the donor’s history first. What catches most people is the reporting obligation. Once you cross $100,000 from a nonresident alien individual or a foreign estate in a year, you file Form 3520, and missing it costs 5 percent of the gift a month, capped at 25 percent, unless you show reasonable cause and not wilful neglect.

Is the inheritance itself taxable to me?

Not as income, and the exclusion itself is short. It covers gifts and inheritances alike and doesn’t distinguish by where the money came from, so a Canadian parent’s estate is treated like an American one for that purpose. One narrow transfer tax sits outside the income rules and can reach you, but only where the donor was a covered expatriate. On the Canadian side the tax at death falls on the deceased, through a deemed disposition of capital property on the final return, which the legal representative files rather than the beneficiaries, and that matters if you are the executor.

“Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.” IRC 102(a)

But there is a transfer tax that reaches recipients, and it is easy to miss because it sits outside the income-tax rules entirely. It applies to what the Code calls a covered gift or bequest.

“If, during any calendar year, any United States citizen or resident receives any covered gift or bequest, there is hereby imposed a tax equal to the product of (1) the highest rate of tax specified in the table contained in section 2001(c) as in effect on the date of such receipt, and (2) the value of such covered gift or bequest.” IRC 2801(a)

And the subsection that follows is headed “Tax to be paid by recipient”: the tax “shall be paid by the person receiving such gift or bequest”. Several conditions keep it narrow, and these are the ones that decide most files. It reaches only a recipient who is a US citizen or resident, which is the opening line of the charge itself. It reaches only property from a covered expatriate, a defined term under the expatriation rules, sketched below and worked through properly on our two exit-tax guides, so an ordinary Canadian parent who was never a US person is outside it. It applies only above the annual gift-exclusion amount for the year. And it is reduced by foreign gift or estate tax paid. Two further exclusions sit in the same section, for property already shown on a timely filed US gift or estate tax return and for property that would qualify for a marital or charitable deduction.

“Subsection (a) shall apply only to the extent that the value of covered gifts and bequests received by any person during the calendar year exceeds the dollar amount in effect under section 2503(b) for such calendar year.” IRC 2801(c)

The reason this is worth checking rather than assuming is that a covered expatriate is not always someone who renounced a citizenship. A green card can put a parent inside the definition, but having held one is not the test on its own. The expatriation rules reach a long-term resident who then gives that status up: broadly, someone who was a lawful permanent resident in at least eight taxable years of the fifteen ending with the year the status ceased, and who also meets one of three further tests before they count as covered. There is a start date on top of that. The rule applies only to gifts and bequests received on or after 17 June 2008, and only from transferors whose expatriation date is on or after that same day, so a card surrendered before then is outside it whatever the year count says. All of that is a question about your parent rather than about you, and our pages on giving up a green card and renouncing US citizenship own that definition.

Two things that survive that exclusion are worth naming. Income the property produces after you receive it is taxable to you, and IRC 102(b) puts income from the property outside the exclusion. It does not say what character that income has, so dividends, long-term gains and tax-exempt interest keep their own treatment rather than all becoming ordinary income. And an inherited foreign account you now hold can trigger its own reporting (FBAR and Form 8938), which is a separate question from the one this page answers.

What amount triggers the reporting obligation?

There are two thresholds and only one is the $100,000, tested in aggregate across related donors. The instructions to Form 3520 set the higher figure for gifts and bequests from an individual or an estate, and a much lower indexed figure for gifts from a foreign company. The second one isn’t printed on the form, which is the part people miss.

Both are tested on what you received during the tax year. The form is due on the 15th day of the 4th month after that year ends, the 6th month if you live and work outside the United States, and the 10th month if you extend.

“You are a U.S. person who, during the current tax year, received either: a. More than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) that you treated as gifts or bequests; or b. More than the section 6039F threshold amount from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that you treated as gifts.” Instructions for Form 3520

Where it came from	Threshold	Where the number lives
A nonresident alien individual	More than $100,000 in aggregate	Fixed, stated in the instructions
A foreign estate	More than $100,000 in aggregate	Fixed, stated in the instructions
A foreign corporation or partnership	The indexed section 6039F amount, far lower	Not on the form; in that year’s revenue procedure

The instructions are explicit that the indexed figure has to be looked up rather than assumed, and they say where: IRS.gov/InflationAdjustment, then the applicable tax year news release, then that year’s revenue procedure, where the figure sits under section 6039F. The same line names a third category of donor whose gifts count against that indexed threshold: any foreign persons you know or have reason to know are related to such foreign corporations or partnerships. That is the rule the worked example below turns on. One more flag on that row. The instructions note that gifts from foreign corporations or partnerships “are subject to recharacterization by the IRS under section 672(f)(4)”, so a company gift is not simply a smaller-threshold version of a parent’s gift.

Do I add up gifts from different family members?

Yes, where the donors are related to each other, and that aggregation rule is what pushes people over a threshold they thought they were under. The instructions require you to combine gifts from different nonresident aliens and foreign estates if you know or have reason to know that those people are related, or that one is acting as a nominee for another. So four separate gifts from four related family members, each comfortably below the line on its own, may still cross it together.

“To calculate the threshold amount of $100,000, you must aggregate gifts from different foreign nonresident aliens and foreign estates if you know, or have reason to know, that those persons are related to each other or if one is acting as a nominee or intermediary for the other.” Instructions for Form 3520, line 54

What’s the penalty if I miss it?

It’s a percentage of the gift, charged monthly, and it’s the reason a tax-free inheritance gets expensive. The rate is 5 percent of the gift per month, capped at 25 percent. On a $400,000 inheritance that caps at $100,000, many times the cost of the filing that would have avoided it.

That’s only half. The same subsection also hands the tax consequences of the receipt to the Secretary, and a showing of reasonable cause without wilful neglect switches off both limbs, the penalty and the determination alike. The clock runs from the form’s due date.

“such United States person shall pay (upon notice and demand by the Secretary and in the same manner as tax) an amount equal to 5 percent of the amount of such foreign gift for each month for which the failure continues (not to exceed 25 percent of such amount in the aggregate).” IRC 6039F(c)(1)(B)

The penalty is only the second half of that subsection, and the first half is the one that should worry you more. The two limbs are joined by “and”, so both follow from the same failure.

“the tax consequences of the receipt of such gift shall be determined by the Secretary, and” IRC 6039F(c)(1)(A)

Read that against the rest of this page. The exclusion in IRC 102(a) is what makes the receipt tax-free, and not reporting it hands the determination of its tax consequences to the Secretary. The statute also carries a reasonable cause exception at IRC 6039F(c)(2), and what it switches off is paragraph (1), which is both limbs, where the failure was due to reasonable cause and not wilful neglect. The Form 3520 instructions describe the same relief in penalty terms only, so the statute is the wider of the two and the one to read. Either way it is a defence to argue after the fact rather than something to rely on in advance.

• Whether a TFSA or similar account is a foreign trust, which is a different Form 3520 question entirely
• Who files Form 3520-A and why it is due early, the annual trust filing
• Fighting a Form 3520 penalty after the notice arrives

The practical read is that the filing is cheap and the downside is not, which is why this is a form to file even where the threshold question is arguable.

What should I do next?

Write down every amount you received in the year, who it came from, and how those people are connected to each other. That list rather than the total is what decides whether you file. If any of it came from a company rather than a person, look up that year’s indexed threshold before assuming you’re clear, because it is nowhere near $100,000.

• Is there a gift tax in Canada?, the Canadian side of the gift question, including the deemed disposition the giver faces
• Cross-border gift tax: Canada and US, the full picture when gifts cross the border (deemed disposition, Form 709, basis mismatch)

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