A US Person Inherits From Canada: No US Tax on the Inheritance — but Form 3520 Reporting, Basis Questions, and What You Now Own

Short version: Form 3520 Explained: Foreign Trusts, Gifts, and Inheritances

The receiving side of a Canadian estate is governed by a principle and a form. The principle: inheritances and gifts are not income to the recipient — a US person who inherits C$800,000 from a Canadian parent pays no US income tax on it, and no US estate tax either (that tax, where it applies at all, belongs to the decedent's estate, and a Canadian parent's estate faces it only on US-situs assets). Canada, for its part, taxed the deceased through the deemed disposition on the final return — the estate's problem, settled before distribution — and imposes nothing on the heir for receiving. The form: Form 3520, Part IV — a US person who receives more than $100,000 in a year from a nonresident alien individual or foreign estate reports the bequests, aggregated across related foreign persons, on a return-deadline schedule; no tax attaches to the form, but the penalty for not filing runs 5% per month up to 25% of the unreported amount — the largest routinely-assessed penalty in cross-border practice for a form that computes nothing. In late 2024 the IRS ended its practice of automatically assessing the penalty at filing for late Forms 3520 reporting foreign gifts and bequests, and now reviews reasonable-cause statements before assessing — a real improvement to the repair landscape, but the filing itself remains the whole game. After the form, the inheritance's composition writes the ongoing file. Cash: nothing further. Canadian securities: basis for US purposes is generally fair market value at death, and Canadian mutual funds arrive as PFICs in a US person's hands — sell-or-restructure is usually the first move. A Canadian house: FMV basis, and keeping it means the non-resident-owner playbook (Canadian rental and section 116 rules on the Canadian side, Schedule E on the US side) or a sale measured from date-of-death value. A RRIF or RRSP interest: the plan's value was taxed on the parent's final return; amounts paid to the US beneficiary carry Canadian non-resident withholding on post-death growth and US inclusion rules with credits — the batch of mechanics that makes registered-plan bequests the most technical thing an heir can receive. An interest in a continuing Canadian trust: the foreign-trust regime — annual 3520s for distributions, beneficiary statements, throwback exposure — the inheritance that keeps inheriting.

Key takeaways

• No US tax on receipt: not income, not estate tax to the heir. The US taxes what the assets do after arrival, not their arrival.
• Form 3520, Part IV: required over $100,000 aggregated from the estate and related nonresident persons for the year; due with the return deadline (including extensions); penalties of 5%/month to 25% of the amount for late filing — file it even when the estate's lawyers never mentioned it, because they never do.
• Basis: inherited property generally takes date-of-death fair market value for US purposes — obtain and keep the estate's valuations; the Canadian deemed-disposition values usually supply the number and the paper.
• Composition drives the follow-on: cash (done), Canadian funds (PFICs — restructure early), Canadian real estate (the non-resident owner playbook or a near-basis sale), RRSP/RRIF proceeds (withholding plus US inclusion with credits), trust interests (the annual foreign-trust file).
• FBAR and 8938 start immediately: inherited Canadian accounts are reportable from the year signature or ownership arrives — the executor's delay in distributing doesn't delay the heir's reporting once accounts are titled or accessible.
• Coordinate with the estate: the Canadian executor's clearance certificate timeline, the deemed-disposition valuations, and any US-situs 706-NA filings all feed the heir's file — ask for the package rather than reconstructing it later.

The first-ninety-days checklist for the US heir

Confirm the year's 3520 obligation and calendar it with the return. Collect the estate package: date-of-death valuations, the final-return deemed-disposition schedule, account statements at death. Inventory what arrived by type and flag the PFICs for restructuring before year-end distributions compound the 8621 work. Add inherited accounts to the FBAR/8938 worksheet. And decide the real estate question — keep (enter the non-resident-landlord machinery) or sell (near-basis, modest gain, section 116 process on the Canadian side) — before a tenant or a season makes the decision by default.

Worked example

A Denver physician inherits from her Toronto mother: C$300,000 cash, a C$450,000 condo, C$220,000 of Canadian equity mutual funds, and the proceeds of a C$180,000 RRIF. Her Form 3520 for the year reports the bequests — filed with her extended return, no tax due on it, penalty exposure of up to US$287,000 avoided by the act of filing. The cash: wired, done. The funds: PFICs on arrival — she has the estate distribute in kind and sells within weeks at date-of-death basis (trivial gain, minimal 8621 exposure for the stub period), repurchasing US-listed equivalents. The condo: appraised at death at C$450,000; she sells eight months later at C$470,000 — the estate's lawyer runs the section 116 clearance, Canada taxes the C$20,000 post-death gain, her US return shows a small gain from stepped basis with the Canadian tax credited. The RRIF: its value was taxed on her mother's final return; the payout to her carries 25% Canadian withholding on the modest post-death growth, included and credited on her 1040. FBAR: the estate account she could draw on and the inherited accounts appear for the year. Total US tax on an C$1.15 million inheritance: a few thousand dollars on post-death growth — and the entire file's risk was concentrated in one information form her mother's Canadian lawyer had never heard of.

Official sources

"For gifts or bequests from a nonresident alien or foreign estate, you are required to report the receipt of such gifts or bequests only if the aggregate amount received from that nonresident alien or foreign estate ... exceeds $100,000 during the taxable year." The penalty is "five percent of the value of the gift or bequest for each month" of non-reporting, "not to exceed 25 percent," absent reasonable cause. — Internal Revenue Service, Gifts from foreign person, https://www.irs.gov/businesses/gifts-from-foreign-person

"U.S. persons (and executors of estates of U.S. decedents) file Form 3520 to report: Certain transactions with foreign trusts. Ownership of foreign trusts under the rules of sections Internal Revenue Code 671 through 679. Receipt of certain large gifts or bequests from certain foreign persons." — Internal Revenue Service, About Form 3520, https://www.irs.gov/forms-pubs/about-form-3520

Practitioner note

Inheritance-from-Canada files are penalty-avoidance files: the tax is nearly always trivial and the 3520 is nearly always the entire exposure, unmentioned by Canadian counsel because it isn't their form. Our intake for a US heir runs composition-first — flag the PFICs and the trust interests before anything else — and the standing instruction we give executors with American beneficiaries is one line: send every heir the valuation package, because their basis and their forms are built from it.

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 US heir's file — the 3520 filing, the estate valuation package, PFIC restructuring, real estate keep-or-sell analysis with section 116 coordination, and the FBAR/8938 additions. See cross-border pricing or book a call.