Principal Issues
Position
Amounts received by a Canadian resident beneficiary from an IRA that qualifies as a foreign retirement arrangement (“FRA”) are generally included in income under clause 56(1)(a)(i)(C.1) of the Income Tax Act (the “Act”).
The inheritance itself is not taxable; however, amounts withdrawn from the IRA are taxable when received.
Reasons
Pursuant to paragraph 69(1)(c) of the Act, property acquired by way of inheritance is deemed to be acquired at its fair market value, and such acquisition does not, in itself, give rise to income.
However, where the inherited property is an IRA, specific rules apply.
An IRA established under subsections 408(a), (b), or (h) of the U.S. Internal Revenue Code is generally prescribed as a foreign retirement arrangement (“FRA”) under subsection 248(1) of the Act and section 6803 of the Income Tax Regulations.
Under clause 56(1)(a)(i)(C.1) of the Act, a taxpayer must include in income the gross amount of any payment received out of or under an FRA, including amounts received as a beneficiary of such arrangement.
This inclusion applies to both lump-sum payments and periodic distributions, and the amount included is before any foreign withholding taxes.
An exception may apply where the amount would not have been taxable in the United States if received by a U.S. resident. However, in general, IRA withdrawals are taxable in the United States, and therefore the corresponding amounts are taxable in Canada.
The Canada–U.S. Tax Convention, specifically Article XVIII (Pensions), does not prevent Canada from taxing such amounts, but limits taxation to the extent the amount would be taxable in the United States.
With respect to Traditional IRAs, income is generally deferred until distribution, and no election is required to defer taxation on undistributed income, as the Act already provides such deferral.
Where applicable, a foreign tax credit may be available under section 126 in respect of U.S. taxes paid on the distributions.
Limitations
The tax treatment of amounts received from an IRA depends on the specific characteristics of the arrangement, including whether it qualifies as a foreign retirement arrangement, and the nature of the payments received.
These comments are general in nature and do not constitute a binding ruling.
Binding confirmation may only be obtained through an advance income tax ruling request submitted in accordance with CRA administrative procedures.
