Blog post

Question

Hi Phil,

I’m a member of your Facebook group for Americans in Canada and have been reading your blog. Your posts on cross-border issues are a lifesaver! I’m reaching out because I’m in a bit of a bind and could use your expertise. I’ve been living in Montreal for eight years (US citizen, Canadian permanent resident, age 45) and recently inherited $4.8 million in investments from my father, who passed away in Boston. The portfolio is held in a US brokerage account now transferred to my name, and it’s a mix of about 60% individual stocks (mostly tech and healthcare), 25% corporate and municipal bonds, and 15% mutual funds. The account generates around $90,000 a year in dividends and interest, which is great but also complicating things.

I’m really confused about the tax implications of this inheritance. I know Canada doesn’t have an estate tax, but does the US impose one on inheritances for US citizens living abroad? And what about Canadian taxes – do I owe anything on the value of the portfolio when I receive it? The stocks and mutual funds have appreciated significantly (some positions date back 20 years), so I’m worried about capital gains taxes if I sell anything. How does that work with the stepped-up basis in the US versus Canadian tax rules? The dividends and interest are already having 30% US withholding tax applied, which is a headache to track. Do I report all of this income on my Canadian tax return, and can I claim a foreign tax credit for the US withholding? I’m also concerned about the mutual funds – I read on your blog that US mutual funds can be a tax nightmare in Canada because of PFIC rules. Is that something I need to address right away?

Another big question is whether to keep the account in the US or move it to a Canadian brokerage. The US account is with a firm I trust, but I’m worried about the extra paperwork (like FBARs and FATCA reporting) and whether it’s worth the hassle. If I transfer the investments to Canada, will that trigger taxes on the unrealized gains? I’m also thinking about using some of the income to fund my kids’ education (they’re 12 and 15), maybe through an RESP or something similar. Is that a good idea, or are there better options for tax efficiency? I feel like I’m in over my head and don’t want to make a costly mistake. Could you help me sort through this and figure out the best way to manage this inheritance?

Best regards, XXXXXX

Answer

Hi XXXXX

Thanks for the email and kind words about the blog articles, glad they’ve been helpful.

I’m also sorry to hear about your father, I know how tough this can be.

Depending on how your father’s trust was established the tax consequences to you will vary. That being said, the portfolio cost basis was likely “bumped” to the fair market value at the time of his death. That means that you’ll only be responsible for any gains on the portfolio going forward. Canada doesn’t have an “inheritance tax”, therefore you shouldn’t have any immediate tax owing on the inheritance.

Given the assets are all US based, you’ll have significant T1135 filing requirements. These requirements can be reduced greatly by moving the accounts to a Canadian investment firm. We can chat about this in more detail during our call.

Any securities that are sold will likely only have gains to the extent they’ve moved up since this time. The calculations and related foreign tax credits can be quite complicated to perform, so you’ll want to ensure you engage a competent cross-border CPA to help. We have walk you through your option for this.

They seem to have incorrectly withheld on the US dividends (should have been 15%), but this can be rectified on your annual 1040 filings as you’ll get credit for the additional withholdings on the return in the form of instalments. I’m assuming the mutual funds are all US based, therefore likely no PFIC filings on these.

In most cases moving the accounts to Canada is the best option. The US firm likely doesn’t even have a license to help Canadian residents and it would need to be move regardless. This transfer can happen tax-free.

The RESP can be tricky, but we can help walk through those option with you.

You have quite a bit going on there, so we should find a time to chat.

You can book a complementary call here: https://beaconhillwm.ca/get-started-now/

I hope that helps and I look forward to our chat.

Cheers

Phil
phil@beaconhillwm.ca