US 1042-S tax exempt?

Tax Topics
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Good afternoon lovely people
I have a client that has received an inheritance from her deceased sister in the States. She received a 1042-S, and after some research, it appears it is exempt. The agent is an insurance company, the proceeds are coded under Chapter 3, 3a Exemption Code 04, 3b tax rate 0.00. There is also an entry on box 4a Exemption Code 15 and 4b Tax rate 0.00.
Proceeds are $225K with another $180K on the way so REALLY hoping these are exempt. Does anyone have experience and can confirm?
Next question…if exempt, does it get entered on Line25600 Additional Deduction?

thanks so much

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Cash inheritances are generally not taxable in Canada. It doesn’t get reported on the T1 at all. But, if it was income (interest, dividends, capital gains, etc) passed through the estate to the beneficiary, it might be taxable. I don’t know what a 1042-S is, so maybe someone else can answer that.

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The 1042-S is an information slip issued by a US payor to a non-resident of the US that reports US income subject to withholding tax.

The Canadian equivalent would be something like our NR4 slip.

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Thanks so much to both of you. We were thinking that it might not even need to be reported on the T1 as well. Yikes, I really do like 100% certainty though and not really feeling that yet. I think the actual name of the slip having the words “subject to withholding tax” is not very helpful either :slight_smile:

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The subject to withholding tax means subject to withholding tax in the US if that makes you feel any better. It makes no claims about other countries. And as you have noted - sometimes even when it’s not subject to US withholding taxes they still issue the slip. Find out for sure what sort of income it is (insurance proceeds vs a 401k payout) and go from there. Insurance proceeds would not be taxable but a 401k (similar to RPP in Canada) payout likely would be since it appears to have bypassed the deceased sister’s tax return. You may need to get in touch with the deceased sister’s accountant in the US to figure out how it was treated there. A 401k payout more than likely would have had tax withheld on it however so it is probably life insurance proceeds.

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Thanks so much Laurie, that makes perfect sense. The accountant may be the easiest route to get the confirmation we’re looking for. I really appreciate your time. Have a great day!!!

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Depending on estate administration there could be an obligation to file a T1142 with the CRA.