Losing a loved one is challenging. And amidst the emotional turmoil, you also have to deal with financial complexities like inheritance tax in Canada. This happens when you inherit money or property. If you’re about to inherit a family asset, you may be concerned about its financial implications.
Thankfully, in most cases, you don’t have to worry about inheritance tax in Canada.
Do You Pay Inheritance Tax In Canada?
If you’re concerned about inheritance tax, you can stop worrying. There is no inheritance tax in Canada.
When someone dies, their estate is taxed before the money is given to the beneficiaries. This prevents those who inherit the money from having to worry about paying taxes.
All estate taxes are paid by the executor (known as the liquidator in Quebec) who is the legal representative responsible for filing the deceased individual’s final tax return. If the deceased individual owes taxes, these are paid before you see any money.
Types Of Assets You Can Inherit And How It’s Taxed
When someone dies, the Canada Revenue Agency (CRA) considers that person’s property and assets to have been sold at fair market value (FMV) just before their death. Even though their belongings were not actually sold, this is the process the CRA uses to calculate capital gains and taxes for the deceased individual’s estate.
Below are some of the different types of assets you may inherit and how they are taxed.
Investments And Stocks
Investments include stocks, mutual funds, ETFs, deposit certificates, treasury bills, and bonds. When someone passes away, it’s up to their executor to report any capital gains made on investments held outside of a registered plan (such as an RRSP).
A capital gain is the increase in the value of an investment from the initial price. The capital gains are listed in the deceased individual’s final tax return.
In Canada, half of capital gains $250,000 and under are taxed at 50%, and two-thirds of gains over $250,000 are taxed.
For example, imagine you purchase $1,000 in shares of a stock. After holding the shares for years, the total investment has grown to $2,000. Meaning, you’ve earned $1,000 in capital gains. When you cash out your investments, you will have to report 50% of the gains as income (since it’s under $250,000), which is $500.
As a beneficiary, it’s important to understand the tax implications as it can affect the net value you receive.
Life Insurance Policy
In most situations, if you are the named beneficiary of the death benefit of a life insurance policy, you don’t have to include it as income or pay taxes. However, if you earn any interest or investment on a permanent life insurance policy you might have to pay taxes.
If there is no named beneficiary on the life insurance policy, it is inherited by the estate and can become taxable income.
RRSPs And RRIFs
How a registered retirement saving plan (RRSP) or registered retirement income fund (RRIF) is taxed depends on whether or not you were named as a beneficiary of the registered account.
If you are a beneficiary on the account, the accounts are not considered income and are not added to the deceased individual’s final tax return. Beneficiaries of an RRSP or RRIF can include:
- Spouse
- Common-law partner
- Financially dependent child or grandchild, under 18 years old
- Financially dependent child or grandchild who is any age and infirm
If you inherit an RRSP or RRIF and are not named as a beneficiary, these accounts are considered income, added to the deceased person’s final tax return, and taxed at the appropriate rate.
Real Estate/Property/Capital Gains
If you inherit real estate or property, how these assets are taxed varies if you are the spouse or partner of the deceased person or not.
As the surviving spouse, common-law partner, or financially dependent child or grandchild under 18 (qualified survivors), you may pay less taxes than a non-spouse or partner. This is because you will inherit the property at the fair market value it held right before your loved one passed away.
If the property has increased in value when you inherit it, you will not have to pay capital gains taxes as long as you are a Canadian citizen and inherit the property within 36 months of your loved ones passing.
If the real estate or property is inherited by the estate, the estate will pay taxes on the capital gains.
Are There Any Inheritance Tax Exemptions?
There are a few inheritance tax exemptions, including:
- The Principal Residence Exemption. This exemption can eliminate or reduce capital gain taxes paid on the deceased individual’s primary residence. When the deceased individual’s principal residence is sold, the gains are not taxed thanks to this exemption.
- The Lifetime Capital Gains Exemption. Canadian residents are entitled to a cumulative lifetime capital gains exemption (LCGE) on net gains from the sale of qualified properties, such as qualified farm or fishing property (QFFP), and qualified small business corporation shares (QSBCS).
What’s The Difference Between An Inheritance And A Gift?
Just as there is no inheritance tax in Canada, there is also no gift tax. This means if you receive any amount of money as a gift, you won’t pay income taxes on it. If a family member gifts you a house or investments while they’re alive, the gift is deemed to be sold at fair market value (FMV), and they are responsible for paying capital gain taxes.
Similarly, if you are the recipient of a gifted house and it increases in value over time, you will have to pay capital gains taxes when you sell the property. In fact, any money earned on gifts and inheritance is subject to tax. For example, if you invest your gift money, the interest earned on it is taxable.
Tips On Estate Planning And Tax Minimization
If you want to make the inheritance process as seamless and tax-efficient as possible, consider these estate planning tips:
Avoid Probate Fees
Probate is a process that confirms if a will is valid in Canada. There is a cost associated with probate, and it varies between provinces. Assigning beneficiaries to registered accounts and holding joint bank accounts with a spouse or common-law partner can prevent them from having to go through the probate process. Similarly, giving gifts to people while you’re alive can help you avoid paying additional probate fees.
Take Advantage Of Spousal Rollover
If property is left to a spouse or common-law partner, these individuals will not have to pay capital gain taxes until they sell the property, gift it, or pass away themselves.
Use The Principal Residence Exemption
Using this exemption can help to avoid paying capital gain taxes on the deceased individual’s primary residence.
Get Life Insurance
Having a life insurance policy in place can ensure that the beneficiary is taken care of. It can also help to cover any costs associated with the estate.
Don’t Worry About Inheritance Tax In Canada
When you lose someone you love, the last thing you want to worry about is if you have to pay taxes on your inheritance. The good news is there is no inheritance tax in Canada. By the time you receive your inheritance, the deceased individual’s estate has already been taxed. Through proper estate planning, you can minimize taxes using techniques like spousal rollover and applying the principal residence exemption. If you still have questions about your inheritance, reach out to a financial professional or lawyer for advice.
