If you’ve just received an inheritance, there’s a good chance you have some mixed emotions about it. Inheritances often arrive at the height of our grief after losing someone who was important to us. To add to the confusion, you may not even know what to do with the money or whether you’ll owe significant taxes.
Maybe you’ve been expecting this inheritance and it’s arrived at the end of your loved one’s long and fulfilled life, or maybe you’ve just come into an unexpected windfall that completely took you by surprise. Either way, the good news is that there’s no inheritance tax in Canada. That means that for the most part, the money you’ve received is yours to keep and you won’t be required to pay additional taxes or claim it as income.
Let’s take a look at how inheritances work in Canada. We’ll also offer you a few tips for your own estate planning. There are ways to make the transition of your estate to your beneficiaries easier and to ensure that no one will pay more taxes than required.
How does tax work on inheritances?
Technically, there is no tax on inheritances in Canada. Before you get too excited though, the absence of a specific inheritance tax is largely due to the way the money is taxed before it transfers to beneficiaries.
In Canada, there will be a final tax return required on a deceased’s income, up until the time of death. Taxes owing will then be collected before any beneficiary receives a dime. (This assumes, of course, that the executor follows legal procedures. If not, they could be held liable for extra monies owing).
Part of the role of the executor is to file a tax return and arrange for any tax balance owing on the amount. Once this has been sorted out, Canada Revenue Agency will provide a clearance certificate, which is an indication that no further taxes will be owed by any estate beneficiaries.
What taxes does a deceased person owe?
Now that you know your inheritance won’t be taxed, you might be curious about how much tax the deceased person will owe before you receive your inheritance. Estate assets are evaluated at fair market value at the time of death. That means that any income they’ve generated is taxable and could result in taxes owing.
You might hear about deemed proceeds of disposition. This is how the value of assets is referred to when someone doesn’t actually receive the amount, like the amount you’re considered to have received upon the disposition of your estate when you die. Because investments are deemed to be sold upon death, they are included in the final tax return.
One exception is when property or assets transfer directly to a surviving spouse or eligible beneficiary under circumstances that allow for the deferral of any taxes owing. This could mean that property or investments like a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) can be transferred without paying capital gains tax at this time, but taxes will be owing eventually upon the beneficiary’s death. This only applies in specific incidences in the case of a spouse or common-law partner, or an eligible dependent under 18 years of age or with mental or physical disabilities.
In all other cases, capital gains tax will be calculated on income from the deceased’s assets and collected ahead of transferring the estate to any beneficiaries.
How can I plan ahead?
Understanding how inheritances work in Canada highlights the significance of seeking reliable estate planning advice ahead of time. A chartered professional accountant experienced in wills and estates can create strategies to minimize your tax burden upon death, thereby maximizing the wealth that transfers directly to your beneficiaries.
One way is to defer some taxes by transferring your assets to a surviving spouse, common-law partner, or eligible dependent. Additionally, there are tax minimization strategies that your accountant can employ to ensure the transfer of your estate complies with legislation while still reducing the taxes owed.
Having an inheritance tax plan in place will give you confidence that your beneficiaries will receive the maximum amount possible. Since they won’t pay tax on any inheritance received, the burden of tax planning falls to you instead.
MMT Chartered Professional Accountant can help
Feeling confused? The changing tax landscape can feel overwhelming, but an experienced accountant will cut through the confusion and identify strategies for wealth retention. We offer a full range of will and estate services and can advise you at every stage of your planning.
And if you’ve just come into a significant inheritance? Get advice on how to invest your new wealth. Planning for the future is always easier when you know where to start.