A Canadian Inherits From a US Estate: No Canadian Tax on the Inheritance, a Stepped-Up Cost Base, and the Paperwork the Estate Handles First

Southbound inheritance is the friendlier direction, because the receiving country is the one without an inheritance tax and the taxing country did its work before the money moved. The Canadian heir's position: an inheritance is not income in Canada — no tax on receipt, whatever the amount — and inherited property is acquired at its fair market value, giving the heir a fresh Canadian cost base from which future gains are measured. The US side belongs to the estate: a US-citizen decedent's estate paid estate tax only above the exemption (US$15 million for 2026 — most estates owe nothing and file accordingly), income in respect of the decedent ran through the estate's returns, and the executor's distributions arrive at the Canadian heir clean. The heir's US touchpoints are procedural: US institutions release a decedent's accounts through the estate's process (and where the decedent was themselves a nonresident with US assets, transfer certificates gate the release); an inherited US retirement account is the exception with real ongoing US mechanics; and inherited US real estate makes the Canadian a non-resident owner of US property with everything that entails at rental or sale time. The ongoing Canadian file is written by what was kept. US brokerage assets: report on the T1 (dividends with their withholding, gains from the stepped-up base measured in CAD) and on the T1135 once thresholds are met — inherited US securities are specified foreign property. US real estate: personal use keeps it off the T1135 and out of income; renting it enters the 30%-or-net-election machinery on the US side with Canadian world-income reporting beside it; selling meets FIRPTA with basis stepped to date-of-death value, which usually makes the withholding-versus-actual-tax gap dramatic and the 8288-B worthwhile. An inherited IRA or 401(k): the genuinely technical bequest — US tax applies to distributions to the foreign beneficiary with treaty rates in play, US inherited-account distribution rules (including the ten-year emptying rule for most non-spouse beneficiaries) force the timetable, and Canada taxes the distributions as pension income with foreign tax credits — a file worth professional hands for its first year and formulaic after.

Key takeaways

• Canada taxes nothing on receipt and resets cost: no inheritance tax, no income inclusion, fair-market-value acquisition — keep the estate's date-of-death valuations as the permanent ACB record, converted to CAD at the date-of-death rate.
• The US taxed the estate, not you: exemption-covered estates pay nothing; larger estates settled their tax before distribution; the heir does not file US returns for receiving.
• T1135 starts where thresholds are met: inherited US accounts and income-producing US property are specified foreign property at their date-of-death cost; personal-use inherited real estate is excluded.
• Inherited IRAs run on US rails: beneficiary distribution rules (the ten-year rule for most non-spouse heirs) set the pace; US withholding applies to payments to the Canadian beneficiary with treaty coordination; Canada taxes distributions with credits — the one bequest that generates annual two-country work by its nature.
• US real estate decisions front-load: sell near basis (small gain, FIRPTA managed with a certificate, clean exit) or keep (the non-resident-owner playbook indefinitely). The stepped-up basis makes the early sale unusually cheap — a fact worth weighing against sentiment promptly.
• Watch the composition for future US-situs exposure: a Canadian who keeps large direct US securities has just imported the US estate-tax situs question into their own eventual estate — the fund-wrapper planning applies to inherited portfolios too.

The first-ninety-days checklist for the Canadian heir

Collect the estate package — valuations, account statements at death, the executor's tax clearance status. Convert everything to CAD at date-of-death for the permanent basis file. Sort the assets: cash (done), securities (T1135 tally, dividend withholding certificates refreshed in your name, restructure oversized direct US positions if estate-situs planning warrants), real estate (the keep-or-sell decision on a calendar, not by drift), retirement accounts (beneficiary elections and the distribution schedule set with advice in year one). Then the Canadian steady state: T1 reporting of what the assets earn, T1135 annually, credits for US withholding — an ordinary investor's file with American labels.

Worked example

A Calgary engineer inherits from his Arizona uncle: US$200,000 cash, a US$350,000 Scottsdale house, US$280,000 of US index funds, and a US$150,000 traditional IRA naming him beneficiary. Canada on receipt: nothing — no tax, and each asset's cost base sets at date-of-death FMV in CAD. The estate: under the exemption, no US estate tax; the executor distributes after the estate's administration. The funds: transfer to his account; his T1135 now carries them at date-of-death cost; dividends flow with 15% withholding under his W-8BEN, credited on his T1. The house: he prices keeping it (Arizona nonresident rental returns plus the net election, Canadian reporting beside) against selling near basis — sells at US$362,000 within the year: FIRPTA's 15% is managed with an 8288-B against a real US tax of about US$2,000 on the US$12,000 post-death gain, Arizona takes its small share, and Canada taxes the CAD-measured sliver with credits. The IRA: the ten-year rule sets his emptying window; he schedules distributions across low-income years, each carrying US withholding at the treaty pension rate, each reported on his T1 with the credit — the one inherited asset still generating filings in year nine, exactly as designed. Total Canadian tax on inheriting US$980,000: zero at receipt, ordinary investor taxation after — and the entire file's complexity lived in two choices, the house and the IRA schedule, both made on purpose in the first quarter.

Official sources

"An executor for a nonresident, not a citizen of the U.S. must file an estate tax return, Form 706-NA ... if the fair market value at death of the decedent's U.S.-situated assets exceeds $60,000." — Internal Revenue Service, Some nonresidents with U.S. assets must file estate tax returns, https://www.irs.gov/individuals/international-taxpayers/some-nonresidents-with-us-assets-must-file-estate-tax-returns

The CRA explains how to calculate and report capital gains and losses, including the inclusion rate and the treatment of net capital losses. — Canada Revenue Agency, Capital gains, https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains.html

Practitioner note

Southbound inheritances are the easy direction with two exceptions we flag on day one: the IRA, whose US distribution clock and withholding mechanics run for up to a decade, and the kept US house, which converts a windfall into a cross-border landlording career nobody interviewed for. Everything else is basis hygiene — the date-of-death package converted to CAD once, filed forever — and the T1135 line that starts the following April.

See also: For Canadian parents gifting money to US children, see Canadian parents gifting money to US children; and browse every cross-border tax topic guide, organized by situation · Short version: Inheriting Across the Border: Canada's Deemed Disposition, the US Estate Tax, and the Beneficiary on the Other Side.

Next step

Fairlight prepares the Canadian heir's setup — the valuation and basis file in CAD, T1135 onboarding, the US real estate keep-or-sell analysis with FIRPTA managed, and the inherited IRA distribution schedule with treaty withholding. See cross-border pricing or book a call.