Inheritance And Taxes

By: Michael L. Williamson, Tax and Accounting Specialist

Lately, I have been posed with this question: do I have to pay taxes on the property that I inherit from my relative? Let’s take a look at this important question.

Is there an Inheritance Tax in Canada?

Canada does not have an estate inheritance or a death tax. In general, there are no taxes levied by CRA on the beneficiaries; without being brazen, when a person dies they leave the Canadian tax system. On death they are subjected to tax for the very last time and the estate pays any tax that is owed to the government.

The estate is treated as a sale, unless the estate is inherited by the surviving spouse or common-law partner, where certain exceptions are possible. Usually by the time the estate is settled, the beneficiary should not have to worry about taxes.

How does Canadian Tax Work in Relation to an Inheritance?

When a person dies, their legal representative has to file a Deceased Tax Return to the government. Any taxes owing from this tax return are taken from the estate before it can be settled.

Once the executor has settled the estate, the CRA issues a clearance certificate to confirm 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 liable for any amount the deceased owes.

What is the Inheritance Tax Rates?

As there is no inheritance tax in Canada, all income earned by the deceased is taxed on a final return.

It’s important for the estate to plan to pay for this tax as it can be a significant amount. As death and death taxes occur at the same time, the estate may find that in this situation a significant portion of its income is taxed in a top tax bracket and therefore could lose about 45 percent to the CRA.

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.

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.

Certain exemptions are available for tax liability incurred for deemed disposition. These include the Principal Residence Exemption and the lifetime Capital Gains Exemption.

How does Tax on Estate Work if the Estate is not Inherited by a Surviving Spouse or Common-law Partner?

The deceased is considered to have sold all of his or her capital property for fair market value immediately prior to death. This includes, with certain exceptions, all the deceased person’s non-registered assets (personal belongings, cars, investments, business assets, etc.).

If any of these assets have gone up in value since their acquisition, the estate will owe taxes on the capital gain in the year of death. Capital gain is the difference between the fair market value of the item when purchased and the fair market value item of the same item at the date of death.

For any registered assets (such as RRSPs and RRIFs), the deceased person is deemed to have received the fair market value of his or her plan assets immediately prior to death. This amount must be included in the income of the deceased person’s tax return.

How does Tax on Estate Work if the Estate is Inherited by a Surviving Spouse or Common-law Partner?

Any non-registered capital property may be transferred to the deceased taxpayer’s spouse or common-law partner.

However, this income inclusion can be deferred if an eligible person has been designated as the beneficiary of the RRSP or RRIF. An eligible person includes a spouse or common-law partner, a financially dependent child or grandchild under 18 years of age or a financially dependent mentally or physically infirm child or grandchild of any age.