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Inheritances and Taxes - Be Careful Where You Step?

Posted by Steve Frye Posted on 25 June 2018

Frequently, I am reminded how careful one has to be with making sure that tax-free inheritances generally maintain their status throughout all steps to liquidate and realize the proceeds. Here is a case in point.

In Owen v The Queen (2018 TCC 90), the taxpayer’s father resided in the United States of America and had a US individual retirement account (“IRA”). The taxpayer’s father passed away. The taxpayer and his siblings were beneficiaries of the estate, which included the IRA account.

The taxpayer’s share of the IRA account was rolled over to an IRA in the taxpayer’s name and funds from that IRA were subsequently distributed to the taxpayer. When the funds were distributed, funds were withheld for US income taxes.

On a reassessment, the Canada Revenue Agency (“CRA”) added the amount to the taxpayer’s income for tax purposes but also took into account of the US taxes withheld and allowed a foreign tax credit. The taxpayer appealed from that assessment, arguing that the amount from the IRA should not be subject to tax because it’s an inheritance.

The Court agreed that the taxpayer had received the amount in dispute as the result of his father’s death, and that generally, receipt of amounts distributed from an estate does not trigger tax. The Court noted, however, that the taxpayer had received the amount in dispute from an IRA, and not (directly) from his father’s estate. With citations from applicable tax legislation on both sides of the border, the court determined the distribution came from a “foreign retirement arrangement”, which is subject to tax on both sides of the border. Essentially, the IRA distribution would be treated in much the same way as if it were a distribution from his father’s RRSP. The court denied the appeal accordingly. Ouch!

I am sure the taxpayer had good reason to do what he did with his father’s money before liquidating it but that extra step led to an unintended consequence. Never a bad idea to check and double check where you step.

Happy Reading!

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