What is inheritance tax in Canada?

a tax on a decedent’s net estate that is levied after the estate is transmitted to the inheritors; DEATH TAX, ESTATE TAX
MERRIAM-WEBSTER

The good news is no inheritance tax in Canada. This means that you do not have to pay personal income tax on the money you receive from an inheritance. However, the estate of the deceased person may have to pay taxes before the money is distributed to the beneficiaries. The estate is treated as a sale by the Canada Revenue Agency (“CRA“), unless it is inherited by the spouse or common-law partner of the deceased. The estate may owe taxes on income, capital gains, or RRSPs/RRIFs of the deceased person.

How much can you inherit without paying taxes in Canada?

Unlike some other countries, Canada does not impose any tax on the money or property you receive from an estate. However, the estate itself may have to pay taxes before it can distribute the inheritance to the beneficiaries. The deceased’s estate is treated as it has sold all of the assets, like property, at the Fair Market Value, and any income or capital gains earned by the deceased are taxed on the final return and paid by the Estate. This also includes all non-registered assets including vehicles, investments, personal items and business assets.

The Executor of the Estate has a legal requirement to file a final tax return and there may be taxes payable before all of the Estate can be distributed. Therefore, by the time you receive your inheritance, you do not have to worry about paying any taxes on it or reporting it as income on your tax return.

For any registered assets like RRSPs or RRIFs, the deceased person is deemed to have “cashed it out” and the amount of the registered asset would be included in the final tax return of the deceased for that tax year.

How are Capital Gains Calculated on Inheritance

Capital gains are the difference between the fair market value (FMV) of the property at the time of inheritance and the sale price of the property at the time that you sell the property.

For example, if you were to inherit a home worth $500,000.00, and then sell it a few years later for $750,000.00, you would be taxed on the capital gains of $250,000.00.

What is the Capital Gains Tax Rate in Canada?

In Canada, only 50% of the capital gain is taxable, and the tax rate depends on your income bracket and province of residence. The maximum tax rate for capital gains in Canada is 27%. There are some strategies to reduce or defer the capital gains tax, such as using registered accounts, reporting capital losses, or claiming the principal residence exemption.

How to avoid paying capital gains tax on inherited property in Canada?

If you inherit a property in Canada, you may have to pay capital gains tax on it if you sell it for more than its fair market value at the time of death. However, there are some ways to reduce or avoid this tax. Here are some options:

Donate the property to a registered charity. You can claim a charitable donation tax credit for the fair market value of the property and avoid paying capital gains tax on it.
Sell the property within two years of the date of death. You can use the principal residence exemption to shelter the capital gain if the property was the principal residence of the deceased or a family member at any time during the ownership period.
Offset the capital gain with capital losses. If you have any capital losses from previous years or from other investments, you can use them to reduce your taxable capital gain on the inherited property.
Incorporate your rental business. If you inherit a rental property, you can transfer it to a corporation and defer the capital gain until you sell the shares of the corporation.
Use tax-sheltered accounts. If you inherit an investment property, you can sell it and reinvest the proceeds in a tax-sheltered account, such as an RRSP, TFSA, or RESP. This way, you can avoid paying tax on the income and growth of your investments until you withdraw them.

Are beneficiaries taxed in Canada?

Beneficiaries, the surviving spouse or common-law partner are not taxed after receiving an inheritance. Money received from an inheritance, like most gifts and life insurance benefits, is not considered taxable income by the CRA, so you don’t have to pay taxes on that money or report it as income on your tax return. The estate of the deceased person may have to pay taxes on its income before the money is distributed to the beneficiaries.

Also, if you invest your inheritance money and earn income from it, that could increase your personal income tax rate and you will have to pay taxes on that income . Therefore, it is important to consult a tax professional if you receive an inheritance in Canada.

How much money can be legally given to a family member as a gift in Canada?

There is no gift tax in Canada, so you can give any amount of money to a family member as a gift without paying tax on it. However, there are some exceptions, such as gifts to your spouse or common-law partner that may affect your income tax. You should also be aware that the person who receives the gift may have to pay tax on any income generated from it, such as interest or dividends.

What assets are taxed at death in Canada?

Any assets that are sold, would be included as income of the deceased and then taxed at the marginal tax rate. Some assets, such as the principal residence or property transferred to a spouse, may be exempt or deferred from this deemed disposition. Additionally, any income earned or interest accrued by the estate may also be subject to tax.

What to Do After Receiving an Inheritance?

Receiving an inheritance can be a mixed blessing. On one hand, it can provide financial security and opportunities. On the other hand, it can come with emotional and practical challenges. Here are some steps to take after receiving an inheritance:

Seek professional advice from a financial planner, a tax advisor, and an estate lawyer. They can help you understand the tax implications, legal obligations, and investment options of your inheritance.
Set aside some money for emergencies, debts, and taxes. Before you spend or invest your inheritance, make sure you have enough funds to cover any unexpected expenses, pay off any high-interest debts, and meet your tax obligations.
Create a budget and a financial plan. Depending on the size and nature of your inheritance, you may need to adjust your lifestyle and goals. A budget can help you track your income and expenses, while a financial plan can help you define your short-term and long-term objectives.
Spend wisely and give generously. While it is tempting to splurge on things you have always wanted, it is also important to be prudent and responsible with your inheritance. You may also want to share some of your wealth with your family, friends, or charities that are meaningful to you.

Final Thoughts on Canadian Inheritance Tax in Canada

In conclusion, Canadian inheritance tax is a complex and contentious issue. While there is no specific Canadian inheritance tax law, there are still some potential tax implications for beneficiaries. The varying tax laws and regulations across different provinces can make it difficult to navigate the inheritance process. However, with careful estate planning and the help of an Estate Lawyer, individuals can minimize the tax burden on their beneficiaries.

It is important for Canadians to stay informed about the current inheritance tax laws and to seek professional advice when dealing with significant assets and to avoid estate planning mistakes. Ultimately, understanding and planning for potential inheritance tax implications is crucial for ensuring a smooth and fair distribution of assets to loved ones.

Inheritance Tax in Canada – What Taxes are payable at Death?