Clarifying Canadian Estate Taxation, (Almost) Everything You Need to Know
One of the most misunderstood issues when it comes to planning your estate is the question of taxes, what tax has to be paid and who pays it. While an in-depth discussion on the topic is beyond the scope of this article, we can certainly clear up a few misconceptions and shed light on the Canadian tax system. A common question I’m asked is what tax do beneficiaries pay? The simple answer is none. There is no inheritance tax in Canada. Any money you get as a beneficiary of an estate is considered after tax money. It doesn’t need to be included in your income. For the most part, this is also the case in many states in the U.S. There are a handful of states such as Iowa, Kentucky, and Pennsylvania which do impose an inheritance tax.
Perhaps the fact that some states have an inheritance tax is the source of the misconception. However, the good news is that in Canada, the estate pays the tax rather than the beneficiary. That means any inheritance received by beneficiaries has already had the required taxes accounted for.
Another misconception comes with estate tax. Does the estate have to pay taxes based on its assets? The answer isn’t quite as straightforward as it is with inheritance tax. The technical answer is no. In Canada, there isn’t any estate tax. There are estate taxes in the U.S., again, which may be the primary source of confusion.
In Canada, the Canada Revenue Agency (CRA) doesn’t have an estate tax, CRA doesn’t tax the assets of the estate, however, they do tax the income. CRA requires that all tax owing on an income, up to the date of death, must be paid. After your passing, a final tax return has to be filed which will include any income received up to the date of your death, which includes income from pension, any investments, or employment.
Also, when you pass, you are deemed to have disposed of all of your assets. That deemed disposition can create additional income that has to be considered in the final return. For example, any real estate you own is deemed as having been sold as of the date of your death, there is an exemption for your primary residence, however, if you have a secondary property or rental property, those properties are considered as sold as of the date of your death.
From a tax point of view, it’s as if you sold the property and any accrued capital gains are triggered and included in your final tax return. Another good example is an RRSP. You are deemed to dispose of the RRSP on the day that you die. It’s as if you withdrew all of the funds from RRSP in one day, it’s all included as income, and is subsequently taxed. If your spouse is named as a beneficiary, the taxable event doesn’t happen, and the money can roll over to your spouse. However, if anyone else is named as the beneficiary of your RRSP, the disposition described above will still happen. Your beneficiary will get the money, but your estate will have to claim the income and will subsequently pay the required tax.
The example I described about of an RRSP applies for essential all registered investment accounts, LIRA, LIF, PRIF, RRIF – when you die, your deemed to have disposed of your registered accounts, any remaining balance is considered income and your estate is required to pay the tax.
Of course, there is an exception to this rule: the Tax-Free Savings Account (TFSA). When you die, the amount in your TFSA, regardless of who you name as your beneficiary, will go directly to the beneficiary and your estate will not be required to claim the income or pay tax up until the date of death.
Unlike the U.S, there is no estate tax in Canada, as I explained above, the CRA does not tax the assets on the estate, they tax the income. However, the provinces in Canada do impose probate fees. Probate fees are distinct and considered separate from income. Probate fees are assessed according to the estate’s overall value, and these fees vary depending on the province. The probate generally increases in proportion to the estate’s overall value. As a comparison, a $500,000 estate in Manitoba would incur $0 in probate fees, as Manitoba got rid of probate fees back in 2020. In comparison, that same estate in Alberta would pay $525 in probate fees, while in Ontario, $6,750 of probate fees would apply, and $6,450 in BC, while Nova Scotia probate fees would be about $7,782.
While Manitoba doesn’t impose probate fees, managing an estate with assets in several provinces, for example, if you own a cottage in another province, can really complicate matters, potentially leading to incurring probate costs on the assets located in other provinces.
Listen, estate and tax planning can be very complicated. It’s worth seeking professional advice from a financial planner, accountant, and lawyer to ensure your estate is set up correctly.
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The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of CG Corp., and may differ from the opinion of CG Corp’s. Research Department. Accordingly, they should not be considered as representative of CG Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or CG Corp. assume any liability.
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