Canadian Inheritance Tax: Myths and Realities

Georgia Swan gets asked this question several times a month: “Do I have to pay taxes on my inheritance from a family member?”

As a tax and estate planner at TD Wealth Management, she realizes that the confusion comes from the fact that the United States has an estate tax. The answer? No, Canada does not have an inheritance tax. Case closed.

“But that doesn’t mean that the deceased person’s estate is not taxed. If the estate does not pay tax on the assets, there are limited circumstances in which the Canada Revenue Agency (CRA) can pursue the beneficiary of those assets for the tax owed,” says Swan.

Swan says the estate itself — the underlying assets like property and investments — is subject to several tax laws. In addition, the person who manages this estate, the executor (or estate trustee), is responsible for seeing that taxes are paid on these assets. This means that taxes must be paid before these assets reach the hands of beneficiaries or heirs and everyone involved must be prepared for this process. Lack of preparation could mean financial complications and wasted money unnecessarily.

In worst-case scenarios, the CRA may turn to a beneficiary to recover funds from taxes owed by the deceased’s estate. For example, if an aunt died due to back taxes, but gave you a house in her will, the CRA may require that house be sold to account for those taxes.

Additionally, if the executor has improperly distributed the assets without regard to the tax owed, the executor may also face personal liability.

Swan says people who write wills and plan estates, as well as those who may inherit those estates, should pay attention to this tax process. Here are some things they should be aware of.

How an estate is taxed in Canada

The tax responsibilities of a simple estate could be organized into two areas: what the estate may owe tax to the CRA, and what probate fees or taxes must be paid in order for the estate to be “discharged” by the courts. provincial.

One of the first steps in settling taxes on an estate is for the executor to file at least two separate tax returns: one for the previous year, if it has not already been filed, and the self- saying “final declaration”. The final return is required for the part of the current year up to the date of death of the deceased person. It is on this statement that accrued capital gains on all assets, the value of Registered Retirement Savings Plans (RRSPs) or Registered Retirement Income Funds (RRIFs) and any income earned during the latter year are declared. Swan says it’s crucial to understand what the tax consequences may be, as this will determine the tax payable after a person dies. The process of administering the estate, and certainly the distribution of any assets to the beneficiary, may not proceed without it.

How real estate capital gains work

In Canada, when a person dies, the Income Tax Act states that the person is considered to have sold all of their assets upon death, which is called a deemed disposition. Capital gains tax applies to assets and property that have increased in value. Among other assets, this applies to investments in non-registered accounts and second homes such as vacation homes or income properties.

Swan says there are exceptions. First, the principal residence exemption allows any capital gains accrued on an individual’s principal residence (usually the family home, but this could also apply to a cottage or other vacation home in certain circumstances) to be protected by the exemption. There are, however, strict rules for applying for the principal residence exemption, so Swan suggests seeking tax advice on this.

Treatment of registered accounts

When you contribute to an RRSP, you generally benefit from a tax advantage at the outset. Upon death, all funds in an RRSP or RRIF become fully taxable on the deceased’s final tax return, unless the RRSP or RRIF is passed on to a surviving spouse. If you have designated a beneficiary (other than a spouse), the beneficiary will get the remaining value of this registered account after taxes have been paid by the estate. For this reason, the executor must ensure that there are sufficient assets in the estate to pay this bill.

By comparison, Tax-Free Savings Accounts (TFSAs) are not taxed upon death. If they have a named beneficiary, a TFSA will generally be transferred to that beneficiary without estate tax consequences.

How probate fees are applied to the estate

Depending on individual circumstances, the deceased’s will may be submitted for probate. As part of this process, a court will be asked to confirm the deceased’s will and affirm that the named executor has the authority to administer the estate. At this time, probate fees or “estate administration tax” may be applied to the estate.

In some provinces, it may be a fixed fee, but in other provinces, such as Ontario, it is calculated based on the value of assets passing through the will: the larger your estate, the higher the fee. probate could be high. Assets included in the probate calculation will generally include the principal residence (unless it is owned jointly, such as with a married couple), other real estate such as cottages or rental properties, and any account not registered. Registered accounts (RRSP, RRIF, TFSA, etc.) will also be included in the probate calculation unless a beneficiary has been properly designated.

How to Get Professional Estate Tax Help

Swan says every family and financial situation is different, and few people have simple estates. Receiving an inheritance from a family member can be bittersweet, but dealing with a complex tax bill may not be the type of inheritance everyone wants. She recommends people hire an estate lawyer and tax professional to make sure you’re structuring an estate plan that can avoid tax issues for your heirs and allow your intentions with your estate to be fulfilled.


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