For inheritances, whether from Canada or from the UK, there wouldn't be any tax to pay on the lump sum received. However, once in your hands, you would be liable to taxes on any interest, dividends or capital gains the invested money might generate. That would be the case whether you physically repatriated the money to Canada or invested it in the UK. People considered residents of Canada for tax purposes are liable to pay income tax on their worldwide income.
Any UK inheritance would first be taxed according to UK laws, notably the inheritance tax, which kicks in above a tax-exempt 300,000 (in 2007-08) pounds sterling amount at a rate of 40%. Afterwards, once in your hands, if left/invested in the UK, there would be UK taxes on whatever income was earned. The UK taxes would count as a credit on your Canadian tax return so you wouldn't get taxed twice.
An interesting potential alternative is for your relative to put in his/her will to create a trust in a low/no tax place like the Isle of Man or the Bahamas. This is called an Inbound Inheritance Trust, which would hold the funds instead of you. The money could then grow on a tax-free basis, much like it does in an RRSP. Any payment to you of the original capital would be tax-free, while you would pay Canadian income tax on withdrawals of any income or gains. An added advantage is that disposal of the trust would not be subject to probate fees ($5 per thousand on the first $50,000 and $15 per thousand on the excess in Ontario). Below are a couple of links to articles that describe the Inbound Trust. Note the comment in the first article that this is a practical strategy for a substantial inheritance of $500k or more and that was back in 2002. Much as I am in favour of do-it-yourself, the complexities of such a vehicle would have me speaking to a lawyer and accountant specialized in such matters in order to get it right and not have it invalidated by the Canada Revenue Agency.
- Michael Berton's article in Advisor.ca
- Lawyer Lorne Saltman of Cassels Brock's presentation. This one also has notes on how the rules in the United States work.