Is money I inherit from Israel taxable in Canada?

A Toronto client once wired herself the equivalent of NIS 600,000 from her late father's Israeli account and then spent a month convinced the Canada Revenue Agency would take a third of it. It would not. Canada has never levied an inheritance, estate, or gift tax on the person receiving the money, so the transfer itself lands in your account tax-free and appears nowhere on your Canadian return as income.

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Detailed Explanation

The reason sits in how Canada taxes death. There is a "deemed disposition" at death, but that tax falls on the deceased's estate, not on the heir, and it applies to Canadian taxpayers. Your Israeli parent was not a Canadian taxpayer, so no Canadian deemed disposition arises on their Tel Aviv apartment or Bank Leumi account. Israel, for its part, abolished its own estate duty when the Estate Tax Law was repealed in 1981. Neither country taxes the act of inheriting.

What is not tax-free is what the asset does after it becomes yours. As a Canadian resident you are taxed on worldwide income, so rent, interest, dividends, and the capital gain on a later sale all belong on your T1. Two reporting duties switch on at inheritance. The T1135 Foreign Income Verification Statement becomes mandatory the moment the cost amount of your foreign property, including an inherited Israeli flat, account, or securities portfolio, exceeds CAD 100,000. And once you draw the funds through the Israeli banking system you clear the succession order and the source-of-funds review before the wire leaves, a process set out in the guide for a Canadian heir withdrawing from an Israeli bank account.

The sting comes years later, on sale, from a mismatch the two systems build in. Canada gives you a cost base equal to the fair market value at the date of death, so a future Canadian gain is measured only from that date. Israel does the opposite. Under the Real Estate Taxation Law 1963, betterment tax (mas shevach) on an inherited apartment runs from the deceased's original purchase price and date, with no step-up. Sell the flat later and you can face a large Israeli tax and a small Canadian one, with the T2209 foreign tax credit capped at the Canadian tax on that gain, which leaves part of the Israeli bill unrelieved. The full mechanics sit in the guide to inheriting Israeli property as a Canadian resident.

In Practice: Israel has charged no estate or inheritance tax since the Estate Tax Law was repealed in 1981, so the Inheritance Registrar (Rasham HaYerushot) issues a succession order (tzav yerusha) with no tax clearance attached, usually in 8 to 12 weeks for an uncontested foreign-heir file. The Canadian cost arrives only on sale: an inherited NIS 2M apartment is taxed by the Israel Tax Authority from the deceased's original 1990s cost, while the Canada Revenue Agency measures your gain from the date-of-death value and caps the T2209 credit at the Canadian tax, so a shekel-heavy Israeli bill can leave tax stranded.

Key Considerations

• The inheritance itself is not taxable income in Canada, and no CRA return reports it as a receipt.
• The T1135 becomes mandatory once your foreign property passes CAD 100,000 in cost, and penalties for missing it are steep.
• Future rent, interest, dividends, and gains on the inherited asset are fully taxable to you in Canada.
• Israel gives no step-up, so a later sale is taxed from the deceased's original cost, unlike Canada's date-of-death base.
• The T2209 foreign tax credit is capped at the Canadian tax on the gain, so a large Israeli mas shevach can go partly unrelieved.

When to Consult a Lawyer

This question typically requires professional legal advice when:

• You inherit Israeli real estate you may sell later and want the no-step-up exposure quantified before you commit.
• Your foreign holdings cross the CAD 100,000 T1135 line and you are unsure which Israeli assets count.
• Several heirs hold the asset jointly and need to coordinate an Israeli sale and the Canadian tax reporting that follows.

A qualified Israeli attorney, working with your Canadian accountant, should map the Israeli and Canadian tax before you sell, not after.

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Speak With an Israeli Attorney

We help Canadian heirs release Israeli inheritances, obtain the succession order, and plan the eventual sale so the Israeli mas shevach and the Canadian tax are reconciled rather than stacked.

Contact us for a confidential initial consultation.