Most people wonder what do you do when anticipating an inheritance from abroad and they want to minimize Canadian taxes on the forthcoming income that will come from this overseas inheritance. The solution is to commence the planning process before the person you’re expecting the overseas inheritance from dies.
How Canadian Inheritance is taxed in Canada
In Canada, deceased persons automatically dispose all assets, at fair market value, to an estate immediately death occurs. After death, a deceased legal representative has to file the optional and final returns to report every income including losses and gains from deemed dispositions. This filing considers all incomes from January 1, year of death, to the actual date of death. Any benefit obtained from the estate assets is normally listed in the estate’s returns so that all estate assets can be dispensed to all beneficiaries named in the deceased person will, safe from Canadian tax burdens.
Is overseas inheritance taxed differently?
As noted above, inheritance coming from Canadians or non-resident relatives overseas is not deemed to be taxable income for the Canadian resident beneficiary. However, since Canadian residents pay taxes on their worldwide income, CRA will tax future incomes from the overseas inheritance. This happens whether or not the overseas inheritance or related income is remitted to Canada.
In order to discourage Canadians from avoiding or deferring tax by gaining investment earnings indirectly via offshore organizations, Canada has set in place sophisticated non-resident organization laws, which become operational the moment a Canadian citizen donates any amount to an offshore trust. Generally, the law stipulates that such an offshore trust’s worldwide income be subject to Canadian taxation as a resident. This means that when a Canadian citizen beneficiary contributes his/her inherited possessions to an organization found in a zero tax jurisdiction, both the trust and the Canadian citizen beneficiary are liable to pay Canadian tax.
Also known as the Granny Trust, this is a frequently used approach that helps to escape Canadian levies on forthcoming income generated from inherited assets. A Granny Trust is formed in a zero tax jurisdiction as stated in the will of the departed relative for the betterment of the Canadian resident beneficiary. As per the common laws of Canada, for an inheritance to be non-resident, it is vital that its control and management is not exercised in Canada. Therefore, when an inheritance trust is entirely disconnected from Canada, it is not subject to non-resident trust rules, as long as there is no time Canadian resident has contributed property to the trust.
An inheritance trust is perfectly legal and is a good way to avert Canadian taxes on any forthcoming income from inherited property, despite the fact that this income is receivable in Canada. To guarantee success in the implementation of this tax plan, you will have to do excellent and competent planning after receiving information in the will of your relative from where the overseas inheritance is anticipated to come. Also, ensure that the management and control of the inheritance tax is entirely in a zero tax jurisdiction for an effective plan.
Sohail Afzal, CPA, CMA, MBA
Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.