Ryan O’Leary is a writer and former financial services professional. He writes about personal finance for Wealthsimple and his work has been featured by the New York Stock Exchange. Ryan holds a Bachelor's degree in International Business from University College Cork in Ireland.
In Canada, there is no inheritance tax. Instead, the Canada Revenue Agency (CRA) treats the estate as a sale, unless the estate is inherited by the surviving spouse or common-law partner, where certain exceptions are possible. This means that the estate pays the taxes owed to the government, rather than the beneficiaries.
Whatever amount the deceased owed in taxes upon death should be settled in what’s called the deceased tax return. By the time the estate is settled, the beneficiary should not have to worry about taxes.You work hard so you can retire. Your money should work hard too. In about five minutes we’ll build you a smart investment portfolio for your retirement - get started.
What is inheritance tax
An inheritance tax is a levy on assets inherited from the estate of a deceased person. Whether you will pay inheritance tax depends on the value of the assets and your relationship to the deceased, with lower values and closer relatives being less likely to be subject to tax.
Inheritance tax is known in some countries as a “death duty” (though not in a legal context), and is called “the last twist of the taxman’s knife.” Perhaps that’s where the famous idiom about death and taxes comes from.
The inheritance tax is essentially collected from the heirs or beneficiaries of the estate of a deceased person. The tax is payable upon the transfer of the estate to the beneficiaries. In most cases, each heir is responsible for paying their own inheritance tax based on the portion of the estate inherited.
The relationship between the deceased person and the beneficiary may impact the necessity to pay the inheritance tax. For instance, spouses are generally excluded from paying the tax. In addition, the entities and organizations that receive the estate as a charitable donation from the deceased person are not required to pay the tax as well.
Lineal descendants and ancestors, including parents, children, siblings, and grandparents, as well as remote relatives and non-relatives, typically must pay the inheritance tax. However, remote relatives and non-relatives generally face a much higher tax rate compared to the close relatives.
Generally, the tax imposed is based on the value of the estate. In certain scenarios, if the value of the estate is below a predetermined benchmark, it will not be imposed.
The inheritance tax is not present in all countries. Some forms of inheritance tax exist in Belgium, Denmark, France, Germany, Italy, Japan, the United Kingdom, and the United States.
Note that in the U.S., the federal government doesn’t have an inheritance tax, and only six states collect one: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Indiana had one but it has since been repealed.
At the same time, some countries, such as Australia, Israel, New Zealand, and Russia no longer impose this tax. Instead of the tax, some countries impose capital gains tax on the asset’s sale or ownership transfer in case of the death of the owner.
How Canadian inheritance tax laws work
When a person dies, their legal representative, the executor, has to file a deceased tax return to the CRA. The due date of this return depends on the date the person died. Any taxes owing from this tax return are taken from the estate before it can be settled (dispersed).
Once the executor has settled the estate, they must ask the CRA for a clearance certificate. This confirms that all income taxes have been paid or that the CRA has accepted security for the payment. As a legal representative, it is important to get this clearance certificate before distributing any property.
If you do not get a certificate, you can be held personally liable for any amount the deceased owes.
What are Canada’s inheritance tax rates?
As there is no inheritance tax in Canada, all income earned by the deceased is taxed on a final return.
Non-registered capital assets are considered to have been sold for fair market value immediately prior to death. Any resulting capital gains are 50% taxable and added to all other income of the deceased on their final return where income tax will be calculated at the applicable personal income tax rates. They are taxed at the applicable capital gains tax rates.
The fair market value of a Registered Retirement Savings Plan (RRSP) or a Registered Retirement Income Fund (RRIF) is included in the deceased person’s income and taxed at the regular applicable personal income tax rates with no special treatment for any capital gains earned within the RRSP or RRIF.
Inheritance tax exemptions
Certain exemptions are available for tax liability incurred for deemed disposition. These include the Principal Residence Exemption and the Lifetime Capital Gains Exemption.
Probate fees and estate tax
An estate tax is imposed by a state or the federal government based on the right to transfer a person’s assets to their heirs after death. An estate tax is based on the overall value of the deceased person’s estate. The estate is liable for paying the estate tax.
In Canada, the CRA does not tax the assets of an estate but they do require that all of the tax owing on income up to the date of death be paid. The government taxes your income but not your assets.
With regards to income tax, both the federal government and the provincial government is owed taxes when you file your annual income tax return. When someone passes away, the executor must file a final tax return as of the date of death. The tax return would include any income they received since the beginning of the calendar.
Some examples of income include:
Canada Pension Plan (CPP)
Old Age Security (OAS)
It’s important to understand that all of your assets are deemed to have been “sold” just prior to death for tax purposes. This would include real estate, land, businesses, investments and your RRSPs.
The deemed disposition (sale of assets for tax purposes) can potentially trigger a lot of taxation. If a spouse is a beneficiary, there could be some rollover provisions where the tax may not be triggered now but deferred until later.
At death there is no tax on the asset but there is a potential deemed disposition of the asset for tax purposes.
In addition to income tax, provinces will have what is commonly known as probate fees. Probate fees vary from province to province and are based on the total assets of the estate.
Let’s use Bob’s estate as an example:
Personal residence = $590,000
Bank account = $22,000
Cottage = $225,000
Non-Registered Investments = $85,000
RRSPs = $90,000
Tax-Free Savings Account (TFSA) = $48,000
Life insurance death benefit = $150,000
For probate purposes, assets with a named beneficiary like life insurance, RRSPs, and the Tax-Free Savings Account (TFSA) are not included. These assets can bypass probate with the direct beneficiary designation unless the designation is the estate. In addition to these direct beneficiary-designated assets, joint assets are typically not included for probate because the surviving joint owner becomes the owner of the asset.
So, in Bob’s example, his total estate would be worth $922,000 (1+2+3+4).
In Canada, every province and territory has different probate fees. These can be illustrated as follows:
If Bob lived in Alberta, the total probate fees would be $525.
If Bob lived in BC, his total probate fee would be about 1.4% of the total value of the estate = $12,900.
If Bob lived in Ontario, his total probate fee would be about 1.5% = $13,800.
If Bob lived in Halifax, his total probate fee would be about $15,000.
Inheriting tax-advantaged accounts
In general, if you transfer RRSPs or RRIFs to your spouse during your lifetime, you’ll pay tax on the full amount at the time of transfer. A more preferable option is to hang on to the money and to split the income taken from RRSPs\RRIFs with your spouse at age 65.
It is possible to transfer your TFSA to your spouse’s TFSA during your lifetime, but only up to your spouse’s TFSA contribution room. That’s generally not preferable either, as you’ll each want to maximize your own TFSA room, which is a lifetime balance of $63,500 for every resident adult, as of January 1, 2019.
Capital assets held in a non-registered account may be transferred to your spouse during your lifetime at your choice of adjusted cost base (ACB) or fair market value (FMV). Both will have tax consequences.
Transfers of assets to children—minor or adult—occur at FMV, but accrued gains at the time of transfer are taxed in the hands of the transferee. In the case of minor children, dividends and interest income will be attributed back and taxed in the hands of the transferor.
There are several elective tax returns that can be filed on death, which will allow certain personal amounts to be claimed again on these additional returns. This can result in a substantial tax benefit.
You can make transfers to the spouse at either the asset’s Adjusted Cost Base (ACB) or FMV, or Undepreciated Capital Cost (UCC), in the case of depreciable assets. If ACB or UCC is chosen, there is a “tax-free rollover”; that is, the tax consequences are completely postponed until the surviving spouse dies.
RRSPs and other pensions
When you leave untaxed accumulations in your RRSP or RRIF, you are deemed to have received the FMV of all assets in your RRSP or RRIF immediately prior to death.
If there is a surviving spouse, the assets may be transferred tax-free to that person’s registered plan (RRSP or RRIF).
If there is no surviving spouse, the RRSP assets are transferred to the estate (unless a beneficiary is specified ). Any decrease in value of RRSP assets while held in the estate may be used to decrease the income reported on the deceased’s final return.
Tax-Free Savings Plans
Earnings in your TFSA are tax-free during your lifetime, but not after death; however, assets may be rolled over to the TFSA of a surviving spouse or common-law partner.
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