What is the proper way to report distribution from an inherited annuity?

I was beneficiary of death benefit from mothers annuity from USA.  I can keep it in place for up to 5 years in her name.  I can take distributions.  How are these distributions recorded on my T1 ... does Canada tax me on the full amount I take out or just on the interest that has accrued?


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There are many factors to consider here in determining if and how this particular annuity would be taxed in Canada. As a general rule, inheritances are "not taxable", only the interest or income you earn on it. However, there are quite a few rules regarding a US Inherited Annuity received by a Canadian beneficiary. 

  • Are you actually receiving the distributions, or are they being held in an estate or trust under your mother's name? As you stated "I can keep it in place for up to 5 years in her name", it appears it may well be held in her estate. This description of the "Five-Year Rule" also leads us to think it may be:
    • Five-Year Rule – The five-year rule requires the inherited beneficiary to receive the full distribution within five years of the annuitant’s death. The beneficiary can take smaller amounts during the five-year period until the full annuity has been disbursed, take the full annuity at the fifth year, or take all disbursement payments immediately following the annuitant’s death. The five-year rule is the only disbursement option available to estates, charities or trusts named as beneficiaries.
  • Was this a Qualified or Non-Qualified Annuity?
    • A non-qualified annuity is an investment purchased outside of a work-related retirement plan using after-tax dollars. These annuities have already been subject to income tax, however, any interest earned will be taxed upon withdrawal. If a beneficiary inherits this type of annuity, they will be required to pay taxes on the growth.
    • When an IRA (Qualified Annuity) is inherited by a beneficiary living in Canada, the amount paid from the IRA to the individual is typically taxable in Canada—in addition to being subject to U.S. tax. When filing a tax return in Canada, you must include the distribution from the IRA with your income. This will allow you to claim a foreign tax credit for the taxes paid to the U.S, including any U.S estate taxes paid on the IRA.

Once you have some more information on the type of plan the annuity comes from, if the distributions are being held in a trust or estate and if they are going to withhold tax on the distributions, it will be easier to advise you on the tax implications in Canada. 

There is some great information in the following links describing different scenarios involving Foreign Inherited Annuities:




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