Tax Question About Inheritance Earning Interest Overseas?

Question

An aunt of mine died two decades ago and passed on her inheritance to my mother, with the instructions that it eventually be passed on to me and my siblings.

My mother left the inheritance overseas and it earned interest from 1995 to 2002.

In 2002, my mother put the account in my name. I left it overseas and it earned interest since 2002.

I now want to bring the money over to Canada. I know there is no inheritance tax here, so I only have to pay tax on the interest earned.

But will I have to pay taxes on interest after 2002 (when my mother gave me the account), or from 1995 (when my aunt passed away)?

If anyone know the answer to this or an accountant which will answer these types of questions via email, I'd appreciate it.

Answer 1

Was the instruction to pass on the money to you in your grandmother's WILL? This is important.

If it was a verbal, non-binding request to your mother before her death and NOT in her will, your mother is the beneficiary. You received the money legally as a gift in 2002 from your mother, and should have paid taxes from that date.

If the instructions were written in the will, and your mother was merely acting as a custodian for the money, you were a beneficiary and were taxable from the date of your grandmother's death.  

As for bringing the money over to Canada, this does not automatically trigger any taxes. Any taxes should have been paid on an ongoing basis, but this is a separate thing from the transfer. The choice, from an ethical perspective,  to report this income is yours.

Also note that you are probably liable for paying tax to the foreign country on interest earned in the foreign country. If this country has a Tax Treaty with Canada, you may be able to deduct this foreign tax from your Canadian tax.

Last, regarding the answer above, CRA will assess penalties and interest on unpaid taxes regardless of whether you amend your returns or not.

Answer 2

Inheritance is not taxable in Canada, but the interest earned from the inheritance is taxable.

While you were given the legal and beneficial interest in the account in 2002, you had the beneficial interest in it in prior years although verbally.  For tax purposes, beneficial interest esp in writing trumps over legal title, meaning you should have reported the interest of pre-2002 years as well.

In the normal course, a taxpayer who has not filed at all would be required to file for 7 years, including the current year, and that a taxpayer who has filed but failed to fully declare, would be required to file for only years that are not otherwise statute barred. Subsection 152(4) generally restricts the CRA from reassessing a return of income for a tax year that is beyond three years from the date of the original Notice of Assessment or of an original notification that no tax was payable for the year. When the normal three-year reassessment period for a tax year ends, the return is considered statute-barred.

However, CRA may use the fact of the disclosure to open, audit and assess statute barred years, under the authority of subparagraph 152(4)(a)(i), which states that the Minister may assess tax, interest or penalties, after the taxpayer's normal reassessment period (3 yrs for most taxpayers) in respect of the year only if the taxpayer :

(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act.

As a minimum, I would recommend you to amend your last 3 yrs returns to report the interest income, before the CRA catches you and applies the penalties.