- Canada does not have an inheritance tax, but there are important tax rules and fees to navigate when dealing with an estate.
- Upon death, certain assets are subject to deemed disposition, requiring executors to file a final tax return and obtain a clearance certificate from the Canada Revenue Agency (CRA).
- Probate fees vary by province, and Canadians with U.S. assets may face U.S. estate tax, making cross-border tax planning essential.
Canadian inheritance tax: Is there such a thing?
The short answer is, no, Canada doesn’t have an inheritance tax, but it’s easy to see why there might be some confusion. While there are some important tax implications families need to address before assets can be dispersed, there is no inheritance tax in Canada, as there is in some U.S. states, a blanket tax rate that applies to all assets upon death.
Key takeaways
From deemed disposition to probate fees, here’s a breakdown of the tax rules you do need to know when planning your estate.
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Is there an estate tax in Canada?
After a Canadian dies, certain assets are subject to a “deemed disposition,” meaning that for tax purposes the government considers the assets to have been sold for fair market value upon death. The executor of the estate is responsible for filing a final tax return that accounts for any capital gains or losses associated with these assets and any other income earned up until the date of death. It’s only after the final return has been filed and any outstanding taxes have been paid that the executor can disburse the remainder of the estate to the beneficiaries stipulated in the will.
If you’re in charge of executing the final wishes of a friend or family member, be sure you request a clearance certificate from the CRA. This certificate confirms that all tax obligations have been met and prevents the executor from being held personally liable if it is later determined that more money is owed.
How are estate assets treated for income tax purposes?
Different tax rules apply, depending on the assets involved and whether they are registered or non-registered.
Registered investments
If there is no eligible beneficiary associated with certain registered accounts, such as Registered Retirement Savings Plans (RRSPs) or Registered Retirement Income Funds (RRIFs), there is a deemed disposition upon death and the entire fair market value of these assets is included as taxable income on the deceased’s final tax return. For TFSAs there is no tax on death, however the account will lose its tax-exempt status thereafter.
Non-registered investments
These assets, which include stocks, mutual funds and non-principal residence real estate, are subject to the deemed disposition upon death. If they cannot be transferred to a surviving spouse or common-law partner, 50% of the unrealized capital gains is included as taxable income on the final return.
Cases with a surviving spouse
If there is a surviving spouse or common-law partner, non-registered capital assets can be transferred to that individual without the estate having to pay capital gains. In this instance, the tax is deferred until the surviving spouse sells the asset or passes away. Registered accounts, such as RRSPs, RRIFs and TFSAs, can also be transferred to an eligible beneficiary. For RRSPs and RRIFs this includes a spouse, common-law partner, financially dependent child or grandchild (under the age of 18), or a mentally or physically disabled child or grandchild of any age. For TFSAs this includes a spouse or common-law partner.
Cases with no surviving spouse
If there is no surviving spouse, partner or eligible beneficiary, taxes cannot be deferred to a later date. This means that 50% of the capital gains on real estate and other non-registered investments is included as taxable income on the deceased’s final return. For RRSPs and certain other registered investments, the entire value of the accounts is included as taxable income.
How are capital gains on investments treated?
If the assets are held in a non-registered account, then 50% of the capital gains on non-registered investments must be included as taxable income on the deceased’s final tax return. Additionally, any income generated by those investments prior to death must be reported as income on that return.
What is probate?
An estate often goes through a legal process referred to as “probate.” Every province has a slightly different fee structure when it comes to probate. In Ontario, probate fees are calculated at $15 per $1,000 (1.5%) on amounts over $50,000. B.C. has a similar structure, with fees up to 1.4% on estates over $50,000, while Nova Scotia charges up to 1.7% for larger estates. Most other provinces have lower probate fees.
In Quebec, the probate process is generally not required for notarial wills, which are legally validated upon creation. If a will in Quebec is not notarized, it must be approved by the Superior Court, a process that can involve additional costs and delays.
One way to reduce probate fees is to shrink the size of your estate before death. This can be done by gifting assets, such as money or real estate, directly to beneficiaries during your lifetime.
How do probate fees work?
The fees associated with the probate process vary by province: some use a flat fee system, while others are based on a percentage of the estate’s value. These costs can add up quickly, particularly for large estates, so be sure you’re aware of the probate fees in the province in which the deceased individual lived and owned assets at the time of death.
Cross-border inheritance and U.S. tax considerations
If you’re a Canadian and own U.S. assets, such as a vacation home or U.S. stocks, those holdings could be subject to the U.S. estate tax when you die. Unlike in Canada, the U.S. taxes the value of certain assets upon death, and for non-Americans, the exemption is only US$60,000. If your U.S. assets exceed that, your estate might owe tax, even if you’re a Canadian resident. To avoid surprises, it’s important to understand how those assets are held. Proper planning, such as using Canadian holding companies or trusts, can help reduce or avoid this tax.
Strategies for taxes and fees
When you sit down to plan your estate, there are a few things you can do to simplify the process and make life a little easier on your executor:
Name a beneficiary – Naming a beneficiary on your RRSPs, TFSAs and other registered accounts can help your estate avoid probate fees, as these assets typically bypass the probate process and are paid directly to the beneficiary.
Joint ownership – Assets held in joint ownership, such as property or bank accounts, generally bypass probate and pass directly to the surviving co-owner, as long as they include the right of survivorship.
Life insurance – A life insurance policy can be a smart way to ensure your loved ones don’t have to sell important assets, such as a family cottage or investments, just to pay the tax bill after you’re gone. This tax-free payout can provide your estate (or its beneficiaries) with the liquidity it needs to cover the cost of deemed disposition without being forced to sell its assets.
