Receiving an Inheritance or Large Gift From Canada as a US Citizen: Form 3520 Considerations

Receiving an inheritance or large gift from a Canadian family member can create a US reporting requirement even when the transfer itself is not ordinary taxable income.

For a US citizen, one of the most important forms to understand is Form 3520.

Form 3520 can be used to report certain large gifts or bequests received from foreign persons, as well as certain transactions involving foreign trusts.

The important distinction is:

"Is this transfer taxable income, or is it a foreign gift or inheritance that still needs information reporting?"

Is a Foreign Gift or Inheritance Taxable Income to a US Citizen?

A genuine gift or inheritance from a foreign individual or foreign estate is generally analyzed differently from wages, business income, dividends or other ordinary income.

However, the fact that a transfer may not be ordinary income does not mean there are no US reporting obligations.

Form 3520 can apply when applicable thresholds and conditions are met.

What Is Form 3520?

Form 3520 is an IRS information return used for certain:

• transactions with foreign trusts
• ownership of certain foreign trusts
• distributions from foreign trusts
• large gifts from foreign persons
• large bequests from foreign persons or foreign estates

The form is informational in nature, but the underlying transaction must first be classified correctly.

What Is a Foreign Person?

For foreign gift reporting, a foreign person can include certain:

• nonresident alien individuals
• foreign estates
• foreign corporations
• foreign partnerships

Different reporting thresholds can apply depending on the type of donor.

What Is the Reporting Threshold for a Gift or Bequest From a Foreign Individual or Estate?

Current IRS guidance states that a US person generally reports gifts or bequests from a nonresident alien individual or foreign estate when the aggregate amount received from that person, estate and applicable related persons exceeds US $100,000 during the taxable year.

Verify the current IRS instructions before publishing and before applying the rule to an individual case.

Related-party aggregation rules can matter.

Is the Threshold Different for Gifts From Foreign Corporations or Partnerships?

Yes.

Gifts treated as received from foreign corporations or foreign partnerships use a different reporting threshold under Section 6039F.

That threshold is inflation-adjusted.

Do not hard-code a dollar figure unless the current IRS threshold for the relevant tax year has been verified.

What If Your Canadian Parent Gives You Money?

If a Canadian parent is a nonresident alien for US tax purposes and makes a genuine gift to a US person, the US recipient should determine whether the aggregate foreign gift reporting threshold has been exceeded.

The source of the funds and nature of the transfer should be documented.

A gift should not be disguised compensation, business income or another type of taxable payment.

What If You Inherit Money From a Canadian Estate?

A bequest from a foreign estate can also be relevant to Form 3520 when the applicable reporting threshold is exceeded.

The US recipient should maintain documentation showing:

• identity of the decedent
• relationship to the recipient
• estate documents
• value received
• date of receipt
• nature of assets received

What If You Inherit Canadian Real Estate?

Inherited foreign real estate can create additional US tax issues beyond Form 3520.

Future issues can include:

• tax basis
• future capital gains
• rental income if the property is rented
• foreign tax credits
• ownership through an estate, trust or entity

The inheritance reporting and future property taxation should be analyzed separately.

What If You Inherit Canadian Investment Accounts?

Inherited investment assets can create additional US reporting after ownership transfers to the US person.

Depending on the assets, future reporting can involve:

• FBAR
• Form 8938
• PFIC rules
• capital gain reporting
• foreign income reporting

See our guide to Form 8938 for Americans living in Canada.

What If the Inheritance Includes Canadian Mutual Funds or ETFs?

Certain Canadian funds can create separate PFIC questions for a US person after the assets are inherited.

The fact that the assets came through an inheritance does not automatically determine their future US tax treatment.

Read our guide to Canadian mutual funds, ETFs and PFIC rules.

What If the Money Comes From a Canadian Trust?

This is different from a simple individual gift or estate bequest.

Foreign trusts can trigger separate Form 3520 rules.

A distribution from a foreign trust should not automatically be classified as a foreign gift.

Trust ownership, distributions and reporting can be highly technical.

Does Form 3520 Mean You Owe Tax?

Not necessarily.

Form 3520 is an information return.

The tax treatment depends on the underlying transaction.

A genuine foreign gift, inheritance, trust distribution or transfer can have different consequences.

The reporting requirement and the income-tax result should be analyzed separately.

What If Several Family Members Send Smaller Gifts?

Aggregation rules can apply to related foreign persons.

Splitting a transfer among related donors should not automatically be assumed to avoid reporting.

The relationship between donors and the source of funds should be reviewed.

What If the Gift Is Paid Directly for Tuition or Medical Expenses?

IRS guidance provides specific treatment for certain qualified tuition and medical payments made on behalf of a US person.

The exact requirements should be verified under current IRS guidance.

Do not assume every education or medical payment qualifies.

When Is Form 3520 Filed?

Form 3520 generally follows the applicable filing timeline described in the current IRS instructions.

The current filing date and extension rules should always be verified for the relevant tax year.

What If You Forgot to File Form 3520?

The correct response depends on:

• the type of transaction
• amount received
• donor or estate
• tax year
• whether foreign trust rules apply
• why the form was omitted
• whether other international forms were missed

Do not automatically file several late Forms 3520 before reviewing the broader situation.

For eligible taxpayers with broader non-willful international filing issues, see our guide to the Streamlined Foreign Offshore Procedures.

Can Missing Form 3520 Create Penalties?

Form 3520 contains significant information-reporting penalty provisions.

The amount and applicability of penalties depend on the type of reporting failure and the facts.

This article does not attempt to calculate penalties for individual cases.

The first step is to determine whether Form 3520 was actually required and what type of transaction occurred.

What Records Should You Keep?

Useful documentation can include:

• gift letter
• estate documents
• will or probate documentation
• bank transfer records
• asset valuations
• donor identity and foreign status
• relationship between donor and recipient
• trust documents where relevant

Common Foreign Gift and Inheritance Mistakes

• assuming a non-taxable gift means no reporting
• confusing a trust distribution with a simple gift
• ignoring related-donor aggregation
• using the $100,000 threshold for foreign corporations or partnerships
• forgetting future FBAR or Form 8938 reporting after inheriting accounts
• ignoring PFIC issues in inherited Canadian investments
• failing to document the transfer
• filing late forms before determining the correct classification

Receiving a Large Canadian Gift or Inheritance?

The transfer itself may be simple from the family's perspective, but the US reporting can depend on who transferred the assets, how much was received and what type of property was involved.

A cross-border review can help determine whether Form 3520 or other international reporting applies before deadlines are missed. For an overview of cross-border filing and reporting support, see U.S. tax services for Americans living in Canada.

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U.S. Tax Professional
Aleksandr Isakov, CPA, Principal of US CAN Tax Group, has 25+ years of experience in U.S. tax and cross-border tax matters.

Frequently Asked Questions

Is an inheritance from Canada taxable in the US?

A genuine inheritance is not analyzed the same way as ordinary income, but US information-reporting and future tax consequences can still apply depending on the assets and circumstances.

Do I file Form 3520 for a gift from a Canadian parent?

It may be required when the applicable foreign gift threshold and other requirements are met.

What is the $100,000 foreign gift threshold?

Current IRS guidance generally applies this threshold to aggregate gifts or bequests received from a nonresident alien individual or foreign estate during the tax year, subject to related-person aggregation rules.

Is the same threshold used for foreign corporations?

No. Gifts from foreign corporations or partnerships use a separate inflation-adjusted reporting threshold.

Does Form 3520 mean I owe tax?

Not necessarily. Form 3520 is an information return, and the tax result depends on the underlying transaction.

What if the inheritance contains Canadian mutual funds?

Future PFIC and other US reporting considerations can arise after the US person becomes the owner.

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Important: This article provides general educational information and is not individualized tax, estate, trust or legal advice.

Official Resources

• IRS — About Form 3520
• IRS — Instructions for Form 3520
• IRS — Gifts from Foreign Person
• IRS — Foreign Trust Reporting Requirements and Tax Consequences
• IRS — About Form 8938
• FinCEN — Report of Foreign Bank and Financial Accounts (FBAR)