The US Retirement Accounts in Canada Series — companion to Post 4
This article is general educational information about cross-border retirement accounts and the Canada-US tax treaty. It is not tax, legal, or investment advice. Inherited retirement accounts are among the least forgiving areas of cross-border planning; several of the deadlines below cannot be extended, and a beneficiary election made incorrectly is often impossible to undo. Two positions in this article rest on a reasoned extension of CRA reasoning rather than a published ruling, and are flagged where they arise. Confirm your situation with a cross-border advisor qualified in both countries before acting.
By Lucas Wennersten, CFP® (US & Canada), CFA · 14-minute read
Part of US Retirement Accounts in Canada — keeping your savings working on both sides of the border.
An IRA you inherit is not a smaller version of an IRA you own. It runs on a different clock, under different distribution rules, and — if you are a Canadian resident — through two tax systems where Canada, not the IRS, ends up setting your final tax rate. Most of the guidance you will find online is written for an American beneficiary living in America, and almost none of it survives the border. This article covers what changes when the beneficiary is in Canada, the Canadian election that can keep a lump sum off a deceased owner’s final return, and what an account owner can do now to spare their beneficiaries the worst of it. For the rules on an IRA you own outright, start with your traditional IRA in Canada.
The short answer
You will generally have to take required distributions each year and empty the account within ten years, and there is no rolling it into your own RRSP. The US taxes the distributions and withholds at source. Canada taxes them as income when you receive them, in the same year.
A foreign tax credit then applies against your Canadian tax on that same income — and because Canada is usually the higher-tax jurisdiction on this income, the credit typically absorbs the US tax in full. What it does not do is cap your total bill at the US rate. You still owe Canada the difference, and that is the number that catches people off guard.
The fork that decides everything
Before any cross-border analysis, US law sorts beneficiaries into categories, and the divide that matters most is spousal versus non-spousal.
A surviving spouse generally has options no one else gets, including treating the inherited IRA as their own. That single choice can convert a ten-year drawdown into a lifetime one.
Everyone else — adult children, siblings, friends, most trusts — falls into the non-spouse category.
A narrower group sits between the two. US law recognises certain eligible designated beneficiaries, which can include minor children of the account owner, disabled or chronically ill individuals, and beneficiaries close in age to the deceased. These may be able to stretch distributions over a longer period.
Where you land is a US-law question, answered without reference to where you live. Canadian residency changes what the distributions cost you — not which category you are in.
The ten-year rule, and the annual payments inside it
For most non-spouse beneficiaries, the IRS requires the account to reach zero by the end of the tenth year following the owner’s death. That much is widely known. What is less widely known is that this is not a single deadline sitting out in year ten.
Required minimum distributions apply each year of the ten-year window, calculated much as an RMD from your own IRA would be, with a final distribution in year ten that empties whatever remains.
That clarification came from final IRS regulations issued in 2024, after several years in which many practitioners assumed — reasonably, given the statute’s silence — that nothing was required until the account had to be emptied in year ten. It is settled now, and the transition relief from the missed-RMD penalty expired at the start of 2025. Skip a required year and it can trigger a real penalty, not merely a larger distribution later.
One exception. If the original owner died before reaching their own required beginning date, no annual amount is required during the ten-year window. Only the year-ten deadline applies, and the beneficiary can draw the account down on whatever schedule they choose before then.
For a Canadian resident, this is the central planning fact, because it removes the option most people instinctively want — leaving the money alone. In many cases you will be recognising income from this account every year, not once at the end. The only question is how much beyond the required minimum you take, and when.
One piece of good news
There is no early-withdrawal penalty on a properly structured inherited account. The 10% additional tax that applies to your own IRA before age 59½ does not apply here. Age is not the constraint. The calendar is.
How the US taxes the distributions
Distributions from an inherited traditional IRA are taxable in the US, and where you are a non-resident alien for US purposes the custodian withholds at source.
The Canada-United States Tax Convention reduces withholding on periodic pension payments to 15%, while a lump sum falls outside that cap and is exposed to the higher statutory rate. Whether an inherited-account distribution qualifies as periodic turns on the substance of the arrangement, and in practice the custodian’s coding drives what actually gets withheld.
To claim any treaty rate at all, the custodian needs a valid Form W-8BEN on file, with a Canadian address and a taxpayer identification number, before the first distribution. Recovering over-withheld tax afterwards means filing a US return and waiting.
If you are a US citizen or green card holder living in Canada, none of the non-resident withholding framework applies to you in the same way — you remain a US taxpayer on worldwide income under graduated rates. The mechanics of taxable IRA distributions are set out in IRS Publication 590-B.
Canada sets the final bill, not the IRS
There is no cross-border timing mismatch on the distribution itself. The US and Canada both tax an inherited IRA distribution on a cash basis, in the calendar year you actually take it, and both countries run on the same calendar tax year for individuals. A distribution taken in November is 2026 income in Washington and in Ottawa alike, and it lands on both returns for the same year.
What people expect instead is double taxation, and that mostly does not happen either — though not because the credit is generous. It is because Canada is usually the higher-tax jurisdiction on this income. Canada gives you a foreign tax credit for the US tax withheld, and because the Canadian tax on the distribution typically exceeds that withholding, the credit is usually enough to absorb the US tax in full. There is rarely a leftover credit stranded, and rarely US tax you cannot recover.
What the credit does not do is cap your total tax at the US rate. It offsets the US tax; it does not erase the gap between the US rate and Canada’s higher one. You still owe Canada the difference, calculated at your Canadian marginal rate — which, once a large inherited-IRA distribution is stacked on top of your other income, can run well above whatever was withheld in the US.
The planning risk here is not a stranded credit. It is a surprise balance owing. What the custodian withholds is not your actual Canadian liability on that income, and the gap between the two is real money you need to have set aside when you file. The Canadian dollar is also typically weaker than the US dollar, so a US-dollar distribution converts into a larger Canadian figure than the headline number suggests.
Shaping the ten-year drawdown to manage your Canadian bracket, and budgeting for a top-up payment to the CRA each year rather than assuming the US withholding was the final word, is the actual lever.
The rights-or-things election
Underneath all of this sits a separate Canadian question: what happens on the deceased’s own return when an IRA owner who is a Canadian resident dies?
Most property is deemed disposed of at death under subsection 70(5), triggering tax on the deceased’s final return. An RRSP or RRIF has its own specific rule forcing the plan’s full value into income in the year of death, under subsection 146(8.8). An IRA is neither — it is a foreign retirement arrangement, taxed under a different provision, clause 56(1)(a)(i)(C.1), that only brings an amount into income when it is actually paid out.
That gap is where the rights-or-things regime does its work. The CRA’s own published position, in technical interpretation 2003-0046111E5, treats an IRA — one where the owner had not yet started required distributions, including where they had begun a substantially equal periodic payment schedule — as a right or thing: an amount that would be included in income when realised, but has not been realised yet.
Under subsection 70(2), the legal representative can elect to report that value on a separate return, filed within a year of death, which buys a second set of graduated brackets. But under subsection 70(3), if the account is instead transferred or distributed to the beneficiary before that election deadline passes, none of it is reported on the deceased’s return at all — the beneficiary simply inherits the account and is taxed under the ordinary foreign-retirement-arrangement rule as distributions are received.
In other words: get the account transferred to the named beneficiary within about a year of death, and Canada does not force a lump-sum inclusion on the deceased owner’s return. The CRA’s guidance for final returns generally is set out in Preparing Returns for Deceased Persons.
This relief has a limit. The CRA’s stated position is that it stops applying once the owner has started taking required distributions before death. At that point the payment already accrued to the date of death goes on the deceased’s own final return, while the undistributed balance continues to flow through to the beneficiary as they receive it.
Does it reach an already-inherited IRA?
The CRA interpretation above was written about an original owner’s account. It does not say, one way or the other, what happens when a beneficiary who is themselves holding an inherited IRA dies before the ten-year clock runs out.
Nothing in the CRA’s reasoning turns on whose account it originally was. The characterisation as a right or thing rests on the amount not yet having been brought into income under clause 56(1)(a)(i)(C.1), and that is equally true of an inherited IRA sitting with a Canadian-resident beneficiary. On that basis the same relief should extend: transfer the account to the successor beneficiary before the 70(2) election deadline, and it should stay off the first beneficiary’s own final return, where annual required distributions were not required.
Once the first beneficiary had started receiving distributions, the same maturity limit described above likely applies: that year’s accrued payment belongs on the first beneficiary’s own final Canadian return, with the rest continuing to flow through to the successor as received.
Treat this as a reasoned extension of settled principles, not settled law. The CRA has not published a ruling on a twice-inherited IRA directly. Confirm it with a cross-border advisor before relying on it.
If your beneficiary dies with the clock still running
US law has its own answer to this, and which one applies depends on which category the first beneficiary was in.
Most Canadian beneficiaries reading this fall into the ordinary non-spouse category on the standard ten-year rule, and that is worth knowing: when that beneficiary dies, the clock does not restart. The successor beneficiary steps into the same ten-year window, still counted from the original account owner’s death, not from the first beneficiary’s.
If the original owner had already begun required distributions, so that annual payments were required during the window, the successor must keep taking them — calculated on the first beneficiary’s own schedule, not recalculated on the successor’s age. Whatever remains must still be fully distributed by the end of the tenth year after the original owner’s death. The successor inherits what is left of the first beneficiary’s time, not a fresh allotment of their own.
If the first beneficiary was instead an eligible designated beneficiary — a minor child of the owner, someone disabled or chronically ill, or a beneficiary close in age to the owner — taking life-expectancy payments, their death does start a new clock. The successor must empty the account within ten years of that beneficiary’s death, not the original owner’s, and annual payments continue to be required throughout that new window, still calculated on the deceased beneficiary’s own schedule.
If no annual payments were required in the first place, because the original owner died before their required beginning date, the successor simply inherits the same full-distribution deadline with no annual amount to match.
Either way the principle is the same: a successor cannot slow the payout below the pace the first beneficiary was already required to take it. Once annual distributions have started for an account, no one downstream can turn them back off.
No, it cannot go into an RRSP
This catches people who have read about the paragraph 60(j)(i) transfer.
That provision allows an indirect transfer of certain US retirement accounts into an RRSP, but it requires the plan to relate to services you performed while a non-resident of Canada. An account you inherited relates to someone else’s employment, so the condition cannot be met.
The full arithmetic of the 60(j)(i) route, and why it rarely works even when it is available, is in transferring a 401(k) or IRA to an RRSP. For an inherited account, it simply is not on the table.
Estate tax runs on a separate track
Income tax on the distributions is one question. Whether the estate itself faced US estate tax is a different one, answered before you receive anything.
An IRA is generally US-situs property, so a deceased non-US person’s IRA can fall within the US estate tax net — though the Canada-US tax treaty provides relief for Canadian residents that the general non-resident rules do not. As a beneficiary you may never see this analysis, but it can affect what actually reaches you, and it is worth asking the executor whether it was addressed.
The two tracks do not offset each other. Estate tax paid by the estate is not a credit against your income tax on the distributions.
For the account owner
If you hold an IRA and any of your likely beneficiaries live in Canada, a short conversation now is worth having.
- Know where your beneficiaries are tax-resident, and revisit it. A designation made when your children lived in Ohio reads differently once one of them is in Vancouver.
- Name individuals directly on the account rather than defaulting to your estate. An IRA payable to an estate can lose options a named person would have had.
- Take advice before naming a trust. Trusts as IRA beneficiaries are technical in the US alone; add a Canadian-resident beneficiary and the complexity multiplies.
- Consider which account each beneficiary receives. Where you hold both a traditional IRA and a Roth, a cross-border beneficiary and a US-resident beneficiary are not affected identically — the Roth rules are in your Roth IRA after moving to Canada.
- Tell them the account exists, and that it comes with a deadline.
- If any beneficiary is a Canadian resident, brief your executor. The account needs to reach that beneficiary within about a year of your death — that is what keeps Canada’s rights-or-things relief available instead of forcing a lump-sum inclusion on your own final return.
If you have just inherited one
Establish which beneficiary category you fall into before anything else, because it determines your timetable. Get the paperwork in order with the custodian before the first distribution rather than after. Map the ten-year window against your expected Canadian income so the drawdown is shaped rather than defaulted.
And budget for the top-up. What the US withholds at source is rarely the full Canadian bill, and the difference is due with your Canadian return, not with the distribution. If you would rather have the numbers run against your actual situation, that is what our cross-border retirement planning work covers.
Frequently asked questions
What happens if I inherit a US IRA as a Canadian resident?
You generally must take required distributions each year and empty the account within ten years if you are a non-spouse beneficiary. Distributions are taxable in the US, subject to withholding, and taxable in Canada as income in the same year. A foreign tax credit offsets the US tax, but because Canada is usually the higher-tax jurisdiction you will typically owe Canada the difference.
Do I have to take distributions every year, or just empty it by year ten?
In most cases every year. Final IRS regulations issued in 2024 confirmed that required minimum distributions apply during the ten-year window, with a final distribution in year ten that empties the account. The exception is where the original owner died before reaching their required beginning date, in which case only the year-ten deadline applies.
Do spouses get different treatment?
Yes, and the difference is substantial. A surviving spouse generally has options no other beneficiary has, including treating the inherited IRA as their own, which can replace the ten-year deadline with a lifetime timetable.
Will I be taxed twice on an inherited IRA?
Generally no. Both countries tax the distribution in the same calendar year, and Canada gives a foreign tax credit for the US tax withheld. Because Canada is usually the higher-tax jurisdiction on this income, the credit typically absorbs the US tax in full. What it does not do is cap your total tax at the US rate.
Why do I still owe Canadian tax if the US already withheld?
Because the credit offsets the US tax rather than capping your overall bill. Your Canadian marginal rate on the distribution is usually higher than the US withholding, so the difference is owed to Canada when you file. Budgeting for that top-up is the single most useful thing a beneficiary can do.
What is the rights-or-things election?
It is a Canadian election under subsection 70(2) allowing a legal representative to report certain amounts on a separate return for the deceased, gaining a second set of graduated brackets. The CRA has treated an IRA as a right or thing where the owner had not started required distributions. Under subsection 70(3), transferring the account to the beneficiary before the election deadline keeps it off the deceased’s return entirely.
Can I transfer an inherited IRA into my RRSP?
No. The paragraph 60(j)(i) transfer requires the plan to relate to services you performed while a non-resident of Canada. An inherited account relates to someone else’s employment, so the condition cannot be met.
What happens if I die before the ten years are up?
For an ordinary non-spouse beneficiary the clock does not restart. The successor steps into the same window, counted from the original owner’s death, and must continue any required annual payments on your schedule. If you were an eligible designated beneficiary taking life-expectancy payments, your death starts a new ten-year window for the successor.
Does US estate tax apply to an inherited IRA?
An IRA is generally US-situs property, so the estate may face US estate tax, though the treaty provides relief for Canadian residents. That is a separate question from the income tax you pay on distributions, and estate tax paid by the estate is not a credit against your income tax.
What should an IRA owner do if their beneficiaries live in Canada?
Confirm where each beneficiary is tax-resident and revisit it, name individuals directly rather than defaulting to the estate, take advice before naming a trust, consider which account each beneficiary receives, and tell them the account exists. Where a beneficiary is a Canadian resident, brief your executor that the account should reach them within about a year of death.
More from US Retirement Accounts in Canada
- US Retirement Accounts in Canada — the pillar guide
- Your Traditional IRA in Canada — the rules for an account you own
- Transferring a 401(k) or IRA to an RRSP — why 60(j)(i) does not reach inherited accounts
- Your Roth IRA After Moving to Canada — the account with different beneficiary consequences
Just inherited a US retirement account, or hold one with beneficiaries in Canada? The decisions that cost the most are made early, and several cannot be undone. Book a complimentary consultation and we will map the timetable, the withholding, and the Canadian top-up before the first distribution locks anything in.
