Estates and Inheritance Tax in Canada

An Estate is the total monetary value of all the deceased’s investments, assets and interests. It includes a person’s belongings, physical and intangible assets, land and real estate, investments, collectibles, and furnishings.

In the simplest terms, 4 things happen when someone passes away:

• Their legal representative commonly known as the Executor or Estate Trustee files their final tax return.
• When someone dies, the CRA treats any property or items owned at the time of death as though it was sold on the day before the person died and deducts taxes from that Estate. Unless the Estate is inherited by the surviving spouse or common-law partner, where certain exceptions are possible.
• The exception to this rule is those assets such as an RRSP, TFSA and insurance policies which have designated beneficiaries. These financial instruments can bypass Probate fees and go directly to the recipients tax-free which is why we encourage making sure you have 2 beneficiaries and contingent beneficiaries on all RRSP, RRIF, TFSA, RESP, and insurance policies.
• The rest of the Estate gets distributed to beneficiaries.

How are the assets of a deceased person taxed?

Different assets are taxed in different ways.

Cottage, stocks, mutual funds and investment properties are considered non-registered capital assets. The CRA considers them as sold for fair market value at the time of death and defines ‘capital gains’ as the difference between the fair market value when the items were purchased and the fair market value when they were sold.

Any capital gains are 50% taxable and added to the deceased person’s other income. When their final tax return is prepared, the Estate will be taxed according to the deceased’s personal income tax rate.

As for registered assets such as RRSPs and RRIFs, these are also included as part of the deceased’s income and taxed at their personal income tax rate. There is no special treatment for any capital gains earned here. However, if beneficiaries are named you can bypass paying tax on these assets.

If the Estate is inherited by a surviving spouse or common-law partner

If you are the spouse or common-law partner inheriting the ‘Estate’ – which may include real estate (i.e., home, vacation and investment properties), registered investments (i.e., RRSPs, RRIFs) and other investments – you’ll likely pay fewer taxes.

As long as you are a Canadian resident and the inheritance is completed within 36 months of your loved one’s death, these assets will be transferred to you at the value they held at the time of death.

There are a few other cases where income taxes may also be deferred. For example, if the beneficiary is a ‘qualified survivor’: a financially dependent child or grandchild under 18 or a financially dependent, mentally or physically infirm child or grandchild of any age.

If the Estate is NOT inherited by a surviving spouse or common-law partner

In the eyes of the CRA, the deceased is considered to have sold all their capital property (including personal belongings, cars, investments and business assets) at fair market value immediately prior to death.

If any of these assets have gone up in value since they were first acquired, the Estate will owe taxes on ‘capital gains’: whatever the assets were worth in the year of death.

Unless these registered assets are inherited by a ‘qualified survivor’ (i.e., a spouse or financially dependent child), they are added to the Estate and included in the income of the deceased person’s tax return. The required taxes are paid by the Estate.

Are there any inheritance tax exemptions?

When the Estate makes a profit from selling a small business, farm property or fishing property, The Lifetime Capital Gains Exemption could spare it from paying taxes on a part – or all – of the profit, it has earned.

It’s also possible for the surviving spouse or common-law partner to receive The Principal Residence Exemption on the dwelling the couple shared. It doesn’t matter whether this property is a house, apartment, trailer, or boat, as long as the couple lived there most or all of the time.

If you invest your inheritance money and earn income (such as interest or dividends) on that investment, however, you’ll be taxed on the income earned. The same rules apply if you sell a capital asset and it increases in value from the time you inherited it. Both these points are worth keeping in mind come tax time.