The Good News First
No Inheritance Tax
| Fact |
Details |
| Canada has |
NO inheritance tax |
| Beneficiaries |
Pay zero tax on what they receive |
| Applies to |
Cash, property, investments |
Unlike the US
| Country |
Inheritance Tax |
| Canada |
None |
| United States |
Federal estate tax (over $12M+) |
| UK |
40% over threshold |
What Taxes Apply at Death
Though No Inheritance Tax, There Are…
| Tax |
Who Pays |
| Deemed disposition |
Estate |
| Final income tax |
Estate |
| RRSP/RRIF tax |
Estate (usually) |
| Probate fees |
Estate |
Deemed Disposition
What It Means
| Rule |
|
| At death |
Deemed to sell all assets |
| At FMV |
Fair market value |
| Capital gains |
Taxed in final return |
How It Works
| Asset |
ACB |
FMV at Death |
Gain |
| Stocks |
$50,000 |
$150,000 |
$100,000 |
| Cottage |
$200,000 |
$500,000 |
$300,000 |
| Art |
$10,000 |
$40,000 |
$30,000 |
The Tax Bill
| Total Gains |
$430,000 |
| Taxable (50%) |
$215,000 |
| Tax (assume 45%) |
~$97,000 |
Exceptions to Deemed Disposition
| Exception |
How It Works |
| Principal residence |
Exempt from capital gains |
| Spousal rollover |
Transfer to spouse at ACB |
| Qualifying farm/business |
May qualify for rollover |
Spousal Rollover
How It Helps
| Scenario |
Tax |
| Leave to spouse |
Deferred at ACB |
| Leave to child |
Deemed disposition |
| Example |
|
| You bought stocks at $50K |
|
| Now worth $200K |
|
| Leave to spouse |
No immediate tax |
| Spouse eventually sells/dies |
Tax then |
What Qualifies
| Eligible |
|
| Spouse |
Yes |
| Common-law partner |
Yes |
| Adult children |
No rollover |
RRSP/RRIF at Death
General Rule
| Full Value |
Taxed as income |
| To estate |
In year of death |
| Can be huge |
Entire balance taxable |
Example
| RRIF Balance |
$500,000 |
| Taxed at |
Top marginal rate |
| Tax bill |
~$225,000+ (varies by province) |
Exceptions
| If Beneficiary Is |
Tax Treatment |
| Spouse/common-law |
Tax-free rollover to their RRSP/RRIF |
| Dependent child/grandchild |
Can transfer, annuity options |
| Adult child |
Full tax to estate |
TFSA at Death
| Good news |
Tax-free to beneficiary |
| Successor holder |
Takes over tax-free |
| Named beneficiary |
Receives tax-free |
| Estate |
Then distributed |
Principal Residence Exemption
At Death
| If Primary Home |
|
| PRE applies |
No capital gains tax |
| Condition |
Must designate |
| Only one per couple |
Per year |
Cottage Considerations
| Scenario |
Problem |
| Own home + cottage |
Only one gets PRE |
| Both appreciated |
One triggers capital gain |
| Strategy |
|
| Choose higher gain |
For PRE |
| Plan ahead |
Consider transferring early |
Probate Fees (Estate Administration)
By Province
| Province |
Fee on $500K Estate |
| Ontario |
$7,000 |
| BC |
$6,510 |
| Alberta |
$525 |
| Quebec (notarial) |
$0 |
See Probate Fees Canada for details.
Final Income Tax Return
What’s Reported
| Income Type |
Included |
| Salary/employment |
To date of death |
| Investment income |
To date of death |
| CPP/OAS |
To date of death |
| RRSP/RRIF |
Full balance (unless rollover) |
| Capital gains |
Deemed disposition |
Terminal Return
| Filing |
Details |
| Due date |
April 30 (or 6 months after death) |
| Who files |
Executor |
| Clearance certificate |
Get before distributing |
Strategies to Minimize Taxes at Death
Spousal Planning
| Strategy |
Effect |
| Leave to spouse |
Defer deemed disposition |
| Name spouse as RRSP beneficiary |
Tax-free rollover |
| TFSA successor holder |
Tax-free continuation |
Principal Residence Planning
| Strategy |
Effect |
| Designate wisely |
Maximize PRE use |
| Consider selling cottage |
While alive, to control timing |
RRSP Meltdown
| Strategy |
Effect |
| Withdraw RRSP gradually |
In lower tax years |
| Before death |
Avoid full balance taxation |
| Consider |
When income lower |
Charitable Giving
| Strategy |
Effect |
| Donate in will |
Donation tax credit |
| Up to 100% of income |
In year of death |
| Reduces estate tax |
On other income |
Life Insurance
| Purpose |
Cover tax bill |
| Beneficiary |
Not your estate |
| Tax-free proceeds |
To pay estate’s taxes |
| Preserve assets |
For beneficiaries |
What Beneficiaries Should Know
You Don’t Pay Tax
| Receiving |
Tax to You |
| Cash from estate |
None |
| Inherited property |
None |
| Inherited investments |
None |
| Inherited RRSP |
None (usually estate paid) |
Your New Cost Base
| Asset Received |
Your ACB |
| Stocks |
FMV at death |
| Property |
FMV at death |
| When You Sell |
|
| Your gain |
FMV at death β sale price |
| You pay tax |
On your gain only |
Foreign Inheritances
General Rules
| Receiving from abroad |
|
| Cash inheritance |
Tax-free to receive |
| Foreign property |
Report if over $100K (T1135) |
| Foreign tax paid |
May be credits available |