Understanding Inheritance and Estate Taxes in Canada
When it comes to estate planning, one of the primary concerns is often minimizing the amount of taxes that will need to be paid. Estate taxes can take a significant chunk out of an inheritance, and it can be quite a complex matter to get into. Luckily, Canada is one of the few countries that doesn’t have a tax levied on inheritance. However, there is an estate tax of sorts that’s actually a lot simpler than any would’ve thought. Let’s look at Canada’s estate tax so you can better understand how it works.
Does Canada Have an Inheritance or Estate Tax?
An inheritance tax is a tax imposed on the transfer of property at death. The tax is levied on the value of the property, less any debts or liabilities of the deceased. Inheritance taxes are sometimes also referred to as estate taxes.
However, in Canada, there is no inheritance or estate tax. But there are some taxes that still need to be settled by the executor of the estate.
Probate fees are charged by the province in which you reside and are based on the value of your estate. These fees can range from a few hundred dollars to several thousand dollars.
If you have any questions about the inheritance or estate tax in Canada, please consult with a qualified tax professional.
What Types of Taxes are Payable at Death in Canada?
As we have seen, there is no inheritance or estate tax in Canada. This is good news for those who are planning to leave their estate to their loved ones. One example of a tax payable at death is deemed disposition.
A deemed disposition is when the Canada Revenue Agency (CRA) considers that you have sold a certain property, even though you have not actually sold it. This usually happens when a person dies, and the CRA considers the market value of the property to be the selling price.
When a person dies, the Income Tax Act considers that the person had disposed of certain property at its market value right before death—although the assets were not actually sold. The Canada Revenue Agency calls this a deemed disposition.
What Property Does Deemed Disposition Apply To?
The Income Tax Act deems that a disposition has occurred on the following types of property when a person dies:
- Real Property: this includes land, buildings, and any interest in land, such as a lease
- Personal Property: this includes vehicles, furniture, jewelry, and collectibles
- Shares of a Corporation: this includes shares of a private company, as well as publicly traded stocks
- Interests in a Partnership: this includes interests in a business partnership, as well as in a limited partnership
- Certain Insurance Policies: this includes life insurance policies with a cash value
The deemed disposition rule does not apply to registered accounts such as Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), or Registered Education Savings Plans (RESPs).
When the deemed disposition rule applies, the property’s market value on the date of death is considered the selling price. The CRA will tax any capital gain that has accrued on the property up until the date of death.
For example, if a person owns a piece of real estate that is worth $500,000 on the date of death, and the property was purchased for $300,000, there is a capital gain of $200,000. The CRA will tax the capital gain at the person’s marginal tax rate.
If the property was left to a spouse or common-law partner, the capital gain may be deferred until the spouse or partner sells the property. If the property was left to a child or grandchild who is a minor, the capital gain may be deferred until the child reaches the age of majority.
In some cases, the capital gain may be exempt from tax. This includes the principal residence exemption and the farm or fishing property exemption.
There are a number of tax considerations when someone dies. It is important to seek professional advice to make sure that the estate is structured in the most tax-efficient manner. If you have questions about estate planning, contact an estate planning lawyer to help you out.
Ontario Wills & Estate Plans are here to help you determine what’s the best legal option for protecting your estate. Whether you need help getting a power of attorney, amending a will, or settling your estate, our team is here to help. Contact us whenever you need help from a competent and reliable wills & estates lawyer.