Inheritance Tax Laws in Canada
Is inheritance taxable in Canada?
There is no inheritance tax or death tax in Canada. This means that if you are a beneficiary and receive an inheritance from an estate, then you personally would not have to pay any tax on the inheritance amount. Instead, the estate would pay tax before any distributions are made to beneficiaries, which would be handled by the executor of the estate.
How is the estate taxed?
There are taxes after death in Canada, but it is the Income of the estate that is taxed, not the assets of the estate (however, probate taxes on assets may apply depending on the estate). In cases of assets, deemed disposition of property, where all of the assets of the estate are considered to be "sold", will result in capital gains that may result in taxable income. The deceased is considered to have "received" the proceeds of the sale of all of their assets, which is then taxed if there is any capital gains, or deducted from capital losses.
This is the idea of the deceased person disposing of all of their capital assets and property just before their death. This is used to calculate the amount of tax owed. The deceased is considered to have "received" the proceeds of the sale of all of their assets, even if their assets weren’t actually sold, which is then taxed if there is any capital gains, or deducted in the case of capital losses.
Taxes at Death
The executor of the estate will file a final tax return in the year of death. This final return, or terminal return, is a regular tax package that would normally be for the province or territory of the deceased person's place of residence. This final return is for the deceased's income for the year of their death, from January 1 up until their date of death. The estate will be taxed for any income made during the year of death.
For example, if the deceased was alive and working and passed away in June, then they would be taxed on their employment income up until their death in June. These taxes after death will be paid from the estate. Rather than a death tax, this tax would be their regular income tax.
Once a final return is filed and taxes are settled, then the executor of the estate can request for a Clearance Certificate from the CRA. A clearance certificate confirms that the estate has paid all owing tax based on the information given, however, it does not guarantee that the estate does not still owe more money to the CRA.
The certificate is used to allow the legal representative of the estate to distribute assets. If a clearance certificate is not obtained, then the legal representative can be personally responsible for tax and penalties still owed to the CRA.
When is the estate taxed?
If death occured between January 1 and October 31, then the due date for the final return is April 30 of the following year. If death occured between November 1 and December 31, then the due date is 6 months after the date of death.
If the deceased person had not filed their previous-year return, which will occur if they die after December 31 but before the filing due date, then the estate would have six months to file the final tax return.
Final Return Due Date (Personal Tax Return)
| Date of Death | Final Return Due Date | |
|---|---|---|
| Already filed previous-year return | January 1 to October 31 | April 30 of the following year |
| November 1 to December 31 | 6 months after the date of death | |
| Has not filed previous-year return | December 31 to Filing Due Date |
If the deceased person operated a business, then the due date of the final tax return will differ. If the date of death is between January 1 and December 15, the due date is June 15 of the following year. If the date of death is between December 16 and December 31, then the due date is 6 months after the date of death.
Final Return Due Date (Business)
| Date of Death | Final Return Due Date | |
|---|---|---|
| Already filed previous-year return | January 1 to December 15 | June 15 of the following year |
| December 16 to December 31 | 6 months after the date of death | |
| Has not filed previous-year return | December 31 to Filing Due Date |
Filing a final return early
The executor of the estate can also choose to file the final return early, before the applicable tax year. For example, if the deceased person’s date of death was in January 2021, the executor of the estate may choose to file the final return that year in 2021, which means income earned by the deceased during January 2021 will be taxed at 2020 tax rates. If tax rates or tax laws change, the estate may request a reassessment in 2022 to apply the 2021 tax changes to the final return.
Inheritance Tax Rates in Canada
Since there are no inheritance taxes in Canada, the deceased’s income is taxed normally on their final return. This means that personal income, such as from employment income, is taxed at their personal income tax rate.
Capital Assets and Capital Gains
All capital property that the deceased owned will have been considered to be sold immediately prior to their death. The value of capital assets that are not in a registered account will be considered to be sold prior to death. 50% of capital gains are then added onto the deceased’s income, which will be taxed at their personal income tax rate.
For example, consider a person holding a publicly-traded stock in a non-registered account. If the person passes away on Saturday, then their capital gains will be calculated using the value of the stock at closing on Friday.
Capital property includes stocks, bonds, and mutual fund units. Capital property can be transferred to the deceased’s spouse or common-law partner at the adjusted cost basis of the property. This means that the deceased will not incur a capital gain or capital loss in their final return. Instead, the beneficiary receiving the capital property will pay capital gains only when they sell the capital property themselves.
For example, let’s say that a person holds Amazon stock with an adjusted cost basis of $2,000. The current market price of Amazon stock is $3,000. While there is an unrealized gain of $1,000, the Amazon stock can be transferred to the person’s spouse at the adjusted cost basis of $2,000 for proceeds of $2,000. The deceased will not have to pay capital gains tax on the unrealized gain of $1,000.
Estate homes are considered to be sold at the current market value at the time of death, whether or not it was sold. Capital gains would be paid by the estate.
You can use a capital gains tax calculator to estimate the amount of capital gains tax owing.
Registered Accounts
For registered accounts, such as TFSAs or RRSPs, the fair market value of these accounts are calculated assuming they were received by the deceased immediately prior to their death. This means that contributions to your TFSA are considered to have been liquidated immediately prior to death, which will result in no income being reported from the TFSA on the final return.
If they held an annuity contract in their TFSA or RRSP, then the annuity contract will no longer be under the TFSA or RRSP immediately after death. Earnings from the annuity contract immediately after death is taxable, with the taxes paid by beneficiaries.
Inheriting Tax-Advantaged Accounts
RRSPs can be transferred to a spouse’s RRSP or a child under the age of 18, tax-free. Otherwise, the RRSP assets will be transferred to the estate.
TFSAs can be transferred to a spouse's or common-law partner's TFSA.
Probate Fees
There is no estate tax in Canada. Some provinces may charge probate fees which can be a flat rate or a percentage of the assets of the estate. You can reduce probate fees owed to the provincial government by having a beneficiary on investments, or co-owning property instead of being the sole owner.
Canadian Inheritance Tax on Property
There is no inheritance tax on property in Canada. If the property that you are inheriting was the principal residence of the deceased, then you would not pay any inheritance tax for the property.
Instead, taxes that you may have to pay for the inherited property would be in the form of capital gains, if applicable. This would be calculated using the fair market value of the property immediately prior to the deceased's death, or it can be calculated using the adjusted cost basis of the property.
For example, let’s say that you inherited a property five years ago, and the current market value of the property is $500,000. When the deceased passed away, the fair market value of the house was $400,000, while the adjusted cost basis of the property was $300,000.
You can choose which value to use in the capital gains calculation, but only at the time of filing the final return. In this case, choosing the fair market value at the time of death would result in a smaller capital gain of $100,000, rather than $200,000. The estate would have paid any capital gains applicable in the final return prior to you inheriting the property at the new adjusted value.
If the value of the property decreased during the deceased’s ownership, such as having a fair market value at death of $200,000 and an adjusted cost basis of $300,000, then choosing the adjusted cost basis would have a smaller capital gain of $200,000 ($500,000 - $300,000), rather than $300,000 ($500,000 - $200,000 = $300,000).
However, you can only choose to use either the fair market value or the adjusted cost basis at the time of filing the final return. You cannot switch between these two values at a later date.
Inheritance Tax Exemptions
Regular tax exemptions apply, such as the Principal Residence Exemption and the Lifetime Capital Gains Exemption.
The Principal Residence Exemption allows you to not have to pay any capital gains on the sale or disposition of your primary residence. In order to qualify for the primary residence exemption, the property must have been your principal residence for every year that you owned it.
The capital gains deduction allows an exemption to capital gains from dispositions of small business corporation shares, farm or fishing property.
In 2020, the lifetime limit was $883,384 for small business corporation shares, which equals a cumulative capital gains deduction limit of $441,692. For farm or fishing property, the limit in 2020 is $1,00,000, equal to a capital gains deduction of $500,000.