If someone close to you lived in BC and named you as a beneficiary of their estate, you may be wondering what comes next, especially if you live outside of Canada. Canadian law allows will-makers to name beneficiaries anywhere in the world, but that does not mean the process is simple for non-Canadian residents.
Some assume that because Canada does not have a direct inheritance tax, the process to collect an inheritance is somewhat straightforward. While a non-resident beneficiary of a Canadian estate will not receive a tax bill simply for inheriting, the inheritance is unlikely to arrive tax-free. Several taxes and withholding obligations apply at the estate level before any distribution is made. Navigating these financials properly often requires the assistance of both a lawyer and an accountant in BC.
What the Estate Owes Before Distribution
Before distribution can take place, the executor must settle estate tax obligations. In Canada, death triggers “deemed disposition,” a rule that treats the deceased as though they sold all of their assets immediately before passing away. As a result, capital gains tax may be due for assets like stocks, bonds, investment properties, and other similar holdings, based on the value increase of the will-maker’s lifetime.
The estate pays these taxes before beneficiaries receive their inheritance. By the time assets reach you as a non-resident beneficiary of a Canadian estate, the estate’s value has already been reduced.
The 25% Withholding Rule
When a Canadian estate distributes income or taxable Canadian property to a non-resident beneficiary, the law requires the estate to withhold 25% of the gross amount and remit it to the Canada Revenue Agency (CRA). This withholding must be submitted by the 15th of the month following the distribution.
If your country of residence has a tax treaty with Canada, the withholding rate may be reduced. A US resident receiving a Canadian inheritance is one of the most common cross-border scenarios. The US and Canada have a tax treaty in place that, depending on the type of income being distributed, can reduce the applicable holding rate to 15% or lower.
Importantly, the executor must be aware of and apply this treaty; this reduction does not happen automatically. Before distributing taxable Canadian property to a non-resident, the executor has two options:
- Obtain a compliance certificate from the CRA, also referred to as a Section 116 certificate or certificate of compliance, which confirms the non-resident’s tax obligations have been addressed.
- Withhold and remit 25% of the gross distribution to the CRA as a prepayment toward any taxes the non-resident beneficiary may owe.
Without a compliance certificate, the 25% withholding is mandatory. The application process can take several months, so executors should identify any non-resident beneficiaries early in the estate administration process.
Non-resident beneficiaries also cannot take advantage of the rollover provisions available to Canadian residents. Under those rules, a resident beneficiary can inherit capital property, such as stocks or mutual funds, on a tax-deferred basis, meaning the estate does not realise a capital gain and the beneficiary only pays tax when they eventually sell. Because that option is not available to non-residents, the estate will likely have to realise and pay capital gains on those assets before distributing them.
Ongoing Income from Inherited Assets
If you inherit an income-producing asset, such as a rental property, the withholding obligation does not end with the initial transfer. The estate, or you as the new owner going forward, must withhold 25% of the gross rental income before each distribution. This rule applies to every payment. Failing to comply with these taxes can create significant problems down the line.
Executor Failures and What They Mean for You
When an executor fails to withhold and remit the required amounts properly, beneficiaries may have grounds to take action.
If the required 25% is not withheld and remitted to the CRA, the executor can be held responsible for the unpaid tax, interest, and any applicable penalties. This liability applies even if the executor was unaware of the beneficiary’s non-resident status, or if the beneficiary later pays tax in their own country. The executor is also expected to understand and apply any relevant tax treaties. In the case of a US resident receiving a Canadian inheritance, for instance, that means correctly applying the Canada-U.S. tax treaty to determine the appropriate withholding rate.
The CRA has the authority to pursue the executor or the estate directly for unpaid amounts. This can result in costly assessments and significant delays in closing the estate, which ultimately affects everyone involved, including you as a beneficiary. Speaking with an estate litigation lawyer is worth considering if you believe an executor has failed to handle these obligations properly.
How Stephens & Holman Can Help
Whether you are a US beneficiary of a Canadian estate or a non-resident beneficiary from another country, working with a lawyer and accountant who understand both Canadian tax law and the rules in your home country can help ensure you receive what you are entitled to, with as little unnecessary tax burden as possible. Stephens & Holman assists clients with estate litigation matters across BC. If you have concerns about how an estate is being administered, or about your rights as a beneficiary, contact one of our offices today to schedule a consultation.