Inheritance Tax in Canada Guide
If you are looking to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (email@example.com) or WhatsApp (+44-7393-450-837).
This article is not formal tax advice, and the facts might have changed since we first wrote it.
If you’re wondering if there is inheritance tax in Canada that you must pay, well there is none. There is no mandate from the Canadian government for you to be subjected to a levy on property or funds that are bequeathed to you. In fact, you are not even obliged to disclose to the government that you collected an inheritance, which can now be another income stream.
That’s not to say that what you inherit had been free from any liabilities. It’s just that government agency Canada Revenue Agency (CRA) considers all of a deceased person’s assets to be part of their estate. The CRA then imposes a direct levy on those assets as soon as the death of the bequeather, just before it gets distributed to whoever the beneficiary is.
To put it another way, the reason you are exempt from paying inheritance tax in Canada is because a levy has already been charged from it in the past.
Inheritance Tax in Canada: Final Tax Return Submission
When a person passes away, a member of the family, a spouse, a close friend, or a legal representative submits the final tax return in his or her stead. The process of calculating taxes for a person who has passed away is, for all intents and purposes, almost identical to the procedure for submitting any other individual tax return. The following are the primary distinctions:
Rollovers: Certain assets are bequeathed to a recipient who is still alive and qualifies. As a direct consequence of this, a rollover will typically be triggered. This is something that frequently takes place with registered accounts like registered disability savings plans (RDSP).
Benefits upon death: In the event that a person passes away in Canada, the individual’s loved ones are frequently entitled to a death benefit from the deceased individual’s employment service. The place of employment issues a slip for the death benefits received. After that point, these amounts have to be included on the individual’s final tax on return of income.
Donations made possible by an estate: When someone passes away, the Will left could specify that the assets owned should be donated to a particular organization. In this scenario, the possibility of a graduated rate estate (GRE) arising exists.
Considered as a disposal of the property: When a person passes away, a deemed sale or transfer of property takes place automatically. A deemed disposition is when the government treats an asset as though it was sold on the day that the person who owned it passed away. The monetary value of presumed dispositions must be declared as a capital gain, which may be subject to taxation depending on the circumstances.
RRSP- and RRIF-generated earnings: On a person’s final tax return, any remaining balance in a registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) is considered income and must be reported as such. Following the completion of the tax process, these funds are typically transferred to a beneficiary who is a spouse, common-law partner, or another individual.
Inheritance Tax in Canada: CRA Role
The CRA deems any property or assets that were held during death like they were sold the day before the individual died, and then docks taxes from that estate. Certain exceptions may apply if you’re inheriting an estate as the survivor of the marriage or common-law partner of the deceased.
Double-check with your executor if they have already secured a clearance certificate from the CRA after submitting the final tax form and clearing any outstanding taxes. This verifies that there are no additional taxes that need to be paid and the assets of an estate can now be distributed freely to the beneficiaries.
In the event that you do not secure the clearance certificate and you get notified at a later date by the CRA about certain additional levies that needs to be settled, you run the risk of being held fully accountable for any such taxes that are outstanding.
Inheritance Tax in Canada: What exactly is an estate, and how is the tax on it calculated?
The aggregate valuation of all of the deceased person’s investments, assets, and interests is referred to as their estate, which encompasses tangible and intangible assets as well as investments.
How is taxation applied to the estate of a deceased person?
Non-registered capital assets include, among other things, a vacation residence, mutual funds and stocks, as well as investment lands and buildings. As was just mentioned, the CRA considers them to have been offloaded during the bequeather’s death for their fair market value. Capital gain is the difference between the item’s modified cost base when it was acquired and its fair market value when it was offloaded.
Any gains from the sale of assets are subject to a tax rate of 50 percent and are posted to the deceased person’s other income. When the estate’s last tax return is prepared, it will be subject to the same level of taxation as the deceased individual’s personal income.
A capital asset may be transferred to the surviving spouse or common-law partner of a deceased individual at the value determined by adjusting the property’s cost basis. This ensures that there will be no gain or loss in the form of capital transactions on the deceased person’s final tax return. Instead, the beneficiary who receives the capital property will only be responsible for paying capital gains taxes if and when they personally sell the capital property.
Registered assets, such as tax-free savings accounts (TFSA), RRSPs, and RRIFs are also part of the deceased person’s income and taxed at the rate that they were subject to during the individual’s lifetime. Since the calculation of the fair market value of these accounts is based on the assumption that they were obtained by the deceased person right before their death, no special condition for any capital gains that may have been earned is imposed.
Because of this, contributions to your TFSA will be treated as if they were liquidated right before the passing of the account holder. As a consequence, there will be no income stated from the TFSA on the final return.
If they had an annuity agreement in their TFSA or RRSP, then after their death, the annuity deal will no longer be covered by the TFSA or RRSP where it was previously held. Any income generated from the annuity contract that occur immediately after death are subject to taxation, and the beneficiaries are responsible for paying those taxes.
RRSPs can be forwarded free of tax to the RRSP of either the account holder’s spouse or a child who is younger than 18 years old. If not, the assets in the RRSP would be forwarded to the estate. TFSAs also are transferrable into the TFSA of a spouse or common-law partner.
Inheritance Tax in Canada: What happens to taxes if a surviving spouse or common-law partner is the recipient of the estate?
The levy that will be charged will most probably be minimal if the spouse or common-law partner of the deceased is the heir and if what’s being inherited is a primary or vacation residence, investment land or building, or other registered investments.
Such assets will be forwarded to the heir with the valuation they held when the bequeather died on two conditions: one, that the heir remains a resident of Canada; and two, that the inheritance is finalized within three years after the death of the bequeather.
It is also possible to postpone paying income taxes in the event that the beneficiary is a an economically dependent child or grandchild under the age of 18 or an economically dependent child or grandchild of any age who suffers from a mental or physical impairment.
Inheritance Tax in Canada: What happens if the estate is not passed on to a surviving spouse or common-law partner?
All the capital property of the deceased, including personal belongings, investments, as well as business assets, will be considered by the CRA as offloaded at fair market value right before death, as per Intuit’s TurboTax.
Should any of these assets have been worth more after they were first accumulated, the estate will be responsible for paying taxes on capital gains. If the registered assets are not inherited by a spouse or dependent child, they are attached to the estate and reflected in the income tax return of the deceased.
Inheritance Tax in Canada: Are there any allowances or exemptions?
If the estate realizes an income after disposing of a small business or farm or fishing property, the Lifetime Capital Gains Exemption may be able to exempt it from being levied on some or all of the earnings it has generated.
A surviving spouse or common-law partner can also be eligible for the Principal Residence Exemption on the property occupied as primary residence with the now-dead individual. It makes no difference whatever type of property it is, as long it was where the couple lived for the majority of or the entirety of their time together. Because of the exemption, you won’t have to pay capital gains tax on the money you make from selling your primary residence.
Inheritance Tax in Canada: Due Dates
According to the Canadian government, if the individual passed away within the start of January to the end of October, the final income tax return must be submitted by end-April of the next year. In the event that the individual passed away within the start of November and the end of December, the deadline is set for a half year following the death date.
If the deceased individual had not submitted their tax return for the prior year, which is the case if they pass away before the date on which the return is due, the estate would have half a year to submit the final tax return.
If the person who passed away owned and run a business, the date by which the final tax return is due will be different. The payment is due on June 15 of the next year if the passing date happened within Jan. 1 and Dec. 15. The deadline is half a year following death if the passing date falls within the 16th and the 31st of December.
Can you submit a final tax return earlier than the deadline?
Yes, it is also an option for an estate’s executor to submit the final return ahead of time, before the beginning of the relevant tax year. What are the repercussions, if any, that result from an increase in the value of an inheritance after it has been received?
If you opt to invest the funds that you collected as an inheritance and generate profit from that investment, the money that you earn will be subject to taxation. When selling a capital asset whose valuation has jumped since such asset has been bequeathed to you, the money that you generated will also be subject to taxation.
Inheritance Tax in Canada: Does Canada impose taxes on monetary gifts?
The answer is no. The CRA does not consider funds collected from an inheritance to be taxable income. This also applies to the majority of gifts and benefits received from life insurance policies.
Inheritance Tax in Canada: Will the US charge a levy on my Canadian inheritance?
It is important to be familiar with the procedure for receiving an inheritance from a foreign country if you are an American citizen so as to prevent unnecessary fines.
Your inheritance might not be taxable in the US, regardless of whether you are an American expat residing in Canada or if you have just obtained it from a relative in Canada. The Internal Revenue Service, also known as the IRS, does not typically impose taxes on inheritances that come from other countries. However, your previous state of residence could have a bearing on this, according to international tax expert Ted Kleinman.
If a Canadian relative has just bestowed an inheritance to you and you have permanent residence in Canada, it is possible that no levies will be charged against it. Inheritances from other countries, including those from Canada, are exempt from taxation for US citizens. This indicates that the government will not take any of your inheritance in the form of taxes.
It’s possible that certain states will tax an inheritance received from Canada. Nevertheless, let’s say that you’ve established your permanent residence in a different nation (such as Canada). In that scenario, it is highly unlikely that you will be required to pay an inheritance tax to the state. Having said that, it is essential that you determine whether or not the inheritance you received from Canada is subject to taxes at the state level.
Even though your inheritance from Canada will not be subject to taxation in the US, particularly if you are no longer a resident of a state in the US that levies a tax on foreign inheritances, it is possible that you will be required to report it to the Internal Revenue Service (IRS), Kleinman said.
When it comes to inheritances from other countries, there is one primary form that must be completed, which is the Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, also known as Form 3520 of the IRS, as per Kleinman.
If you intend to transfer funds from your Canadian inheritance to an American bank account, you will likely be obligated to disclose your Canadian inheritance to the Financial Crimes Enforcement Network (FinCEN).
Inheritance Tax in Canada: On to the Probate Process
What is the definition of probate?
Probate is the name of the legal procedure that must typically be followed when dealing with estate matters after the death of the owner of such asset. The initial move in the probate process is the verification of the Will in question to determine if it’s genuine and legally binding.
The administration of probate will also be required in the event that the deceased individual did not leave a Will.
How are the fees for the probate determined?
The costs associated with probate can be difficult to understand, and they change from one province to the next. While there is no tax imposed on the assets of an estate, the provinces collect fees for the probate process prior to the transfer of the assets of an estate to the beneficiaries.
The costs of the probate process can be calculated as a flat fee or as a portion of the estate’s assets. If you have a beneficiary on investments or a co-owner of the property rather than being the sole proprietor, you might be able to cut down on the amount of money that must be paid to the provincial government as probate fees.
Probate may not be necessary for certain estate assets, which will ultimately result in cost savings. A life insurance policy, a trust fund, and the majority of registered investment products are some examples of assets that can have a beneficiary named for them.
How to sidestep probate in Canada?
The costs associated with probate can be quite elevated. Because of the cost, the amount that your beneficiaries receive will be reduced. To keep costs associated with probate to a minimum, do the following:
Co-ownership of a piece of real property
When one of the co-owners of jointly owned real estate passes away, the property is typically transferred to the surviving co-owner, who then takes full control of the asset. This will make it possible for real estate to avoid going through the probate process. When there is a surviving spouse, this is the scenario that occurs most frequently.
Transferring an inheritance after a person’s death in Canada
If you make gifts of your assets while you are still alive, the value of your estate will be reduced when you pass away. As a direct consequence of this, the total value of the estate that is used to determine your probate fees is decreased. Both the person who is giving the gift and the person who is receiving it do not have to pay taxes on the transaction.
Gifting assets to members of your family before you pass on can also be an effective way to encourage the growth of wealth within the family. As a direct result of this, this is also one way to avoid paying estate tax in Canada.
You need to designate beneficiaries for your assets
RRSPs, TFSAs, and any other assets that are comparable need to have beneficiaries designated. When this occurs, the assets in question are not counted as part of an estate when the probate fee is determined.
The ability to completely avoid incurring the cost will be based on the size of your estate. However, careful planning can absolutely bring the cost down to a manageable level.
Inheritance Tax in Canada: Conclusion
You will be able to start making decisions concerning your inheritance once you have collected your inheritance in Canada and have taken care of any relevant taxes that are due to you in the event that you sell or otherwise dispose of your inheritance.
You can seek the assistance of a financial adviser who can provide you with guidance, especially if you are eyeing various investment opportunities available for the assets that you inherited.
Pained by financial indecision? Want to invest with Adam?
Adam is an internationally recognised author on financial matters, with over 694.5 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.