The inheritance tax in Canada is a topic that eludes many Canadians. However, it’s an important issue that deserves attention. Unfortunately, this is a complex subject and there is a lot of misinformation floating around about it. So that’s why I’ve taken it upon myself to dispel any myths and give you all the details you need to keep in handy.
If you want to learn more about this prevalent financial matter, read on!
What is the Inheritance Tax?
Before delving deeper, I’ll first explain the inheritance tax.
The inheritance tax is a tax that is charged on the value of your estate when you die. Namely, the estate includes all your assets, such as your home, investments, savings, and personal belongings.
The tax is paid by the deceased person’s estate, which is why it’s also called death duty or death tax in Canada. Therefore, the executor of the estate (the person managing and distributing the deceased person’s assets) or the beneficiary that receives the inheritance will be responsible for paying any taxes.
The executor will usually file the deceased tax return from the estate’s assets before distributing them to beneficiaries. Inheritance taxes usually apply if the beneficiary isn’t a spouse or a common-law partner. In addition, inheritance taxes apply to an inheritance that’s above a certain amount. However, this amount depends on the country and some other specific conditions.
Interestingly enough, although there are some taxes after death in Canada, an inheritance tax is not one of them. However, there are many countries around the world that have inheritance taxes. Here are some of them:
Canadian Inheritance Tax Laws
So, how do Canada’s inheritance tax laws work? Well, as I briefly mentioned, since the laws on inheritance are generally concerned with the estate, the executor is the one that files the deceased tax return. Remember that the due date depends on the date when the person died, so if the death was after tax season, their returns will be filed for the next tax season.
After settling the estate, the executor will ask for a Clearance Certificate from the Canada Revenue Agency (CRA), confirming that the deceased does not owe any more taxes. Therefore, if you don’t get a certificate, you may be held liable for any amount owed.
Moreover, it’s essential to remember that the laws differ depending on whether or not the estate is inherited by a surviving spouse or a common-law partner.
Accordingly, if it isn’t, the CRA considers the deceased to have sold the property for Fair Market Value prior to death and if any assets have gone up since acquisition, the estate will have to pay the capital gains tax to Canada for inheritance in the year the deceased passed away. RRSPs and RRIFs also follow the Fair Market Value and the amount is part of the deceased tax return.
On the other hand, if a spouse inherits the estate, the CRA deducts the taxes and the surviving partner doesn’t have tax ramifications, while the value of the assets remains unchanged. If the beneficiary is also named on RRSPs and RRIFs, they can also defer income tax.
What Are Canada’s Inheritance Tax Rates?
Because of the lack of inheritance tax in Canada, all earned income is noted in the final tax return for the deceased. Here’s how it works for particular assets:
Capital assets and capital gains: The CRA views these assets as having been sold for Fair Market Value immediately prior to death. However, the resulting capital gains are 50% taxable and included in the final tax return, subject to income tax.
Registered accounts: The RRSP’s and RRIF’s Fair Market Value is also included in the deceased’s income and taxed at applicable income tax rates.
Tax-advantaged accounts: Accumulated investments in a TFSA are tax-free and thus your estate will not owe taxes on earned gains and the money won’t be subject to probate. For this to be applicable, you need to name a partner or descendants as a beneficiary on your accounts.
Probate fees: Canadian provinces charge a probate tax before they transfer assets to the designated beneficiaries. These fees vary by province. To bypass probate, you should name a beneficiary on life insurance policies or registered investment products.
As with all things, there are exemptions from paying taxes after death in Canada. In fact, you can generally do this in two ways: the Principal Residence Exemption and the Lifetime Capital Gains Exemption.
However, before going over these, there is another means to waiving taxes on estates – by gifting property to beneficiaries as a gift. Namely, if you receive property as a gift from a living benefactor, the CRA considers you to have acquired it at FMV.
Principal Residence Exemption
The Principal Residence Exemption on death applies to a primary residence (the home in which you live) and can significantly reduce the tax owing on your estate. To qualify for this exemption, you need to meet the following criteria:
- The property must be a housing unit
- The taxpayer must designate the property as principal residence
- The taxpayer must own the property (joint ownership also applies)
- The property must be inhabited by the taxpayer, the (former) spouse/common-law partner, or the child
- The taxpayer can designate only one property as a principal residence for a tax year
- A family unit can designate only one property as a principal residence
Lifetime Capital Gains Exemption
Another exemption you can take advantage of is the Lifetime Capital Gains Exemption (LCGE). This exemption can reduce the tax owing and applies to assets that have increased in value over time, such as stocks, bonds, or mutual funds. Therefore, the LCGE allows you to exempt a certain amount of these gains from taxation. To be eligible, you need:
- To have been a resident of Canada for at least part of 2021
- To have been a resident of Canada throughout 2020 or 2022
The capital gains inclusion rate for 2021 was ½, thus only 50% of capital gain was taxable. However, the amount you receive from the LCGE depends on several factors, but check out the official site for more detailed information.
The Bottom Line
Although there is no inheritance tax in Canada, taxes after death is a complex topic that requires attention and basic understanding. If you’re planning on leaving assets to your loved ones, or if you’re the one receiving the assets, ensure you speak with a qualified professional who can guide you and allow you to take advantage of the exemptions available to you.
No, there is no tax on inheritance in Canada. However, there is an estate tax of sorts that calls for an executor to pay taxes on the estate’s income before they distribute the money to a beneficiary.
You can avoid taxes on your estate if the property is your principal residence, absolving you of the obligation to pay tax on capital gains. You can also take advantage of the Lifetime Capital Gains Exemption to reduce your tax owing on capital accumulation on properties and investments.
Yes, a spouse is entitled to inheritance money without the obligation to pay taxes.