Is there such thing as estate and inheritance tax in Canada?

Recently I wrote a piece on how to handle an inheritance and got a few questions from RetireHappy readers.  One of the areas greatly misunderstood in Canada is issues around taxation when you die and when you inherit money so I thought I would address some of these common questions.

Is there inheritance tax in Canada?

In Canada, there is no inheritance tax.  If you are the beneficiary of money or asset through an estate, the good news is the estate pays all the tax before you inherit the money.  Technically, once you inherit money, the tax has already been paid.  You do not have to add inheritance to your income tax return.

What about estate tax?

Often estate tax refers to taxing the value of the estate. In Canada, Canada Revenue Agency (CRA) does not tax the assets of an estate but they do require that all of the tax owing on income up to the date of death be paid.  The government taxes your income but not your assets.

With regards to income tax, both the Federal Government and the Provincial government gets taxes when you file your annual income tax return.  When someone passes away, the executor must file a final tax return as of the date of death.  The tax return would include any income they received since the beginning of the calendar.  Some examples of income include Canada Pension Plan (CPP), Old Age Security (OAS), Retirement Pensions, Employment income, dividend income, RRSP and RRIF income received, etc.

Related article:  Understanding Canadian Tax Brackets:  Marginal Tax vs Average Tax

With regards to your assets, it's important to understand that all of your assets are deemed to have been “sold” just prior to death for tax purposes.  This would include real estate, land, businesses, investments and your RRSPs.  Here are a few common examples of how this “sale” of assets can create income tax at death.

  1. Joe has $100,000 in RRSPs.  When he passes away, the $100,000 RRSP is deemed to have been cashed in and on Joe's final tax return, $100,000 of RRSP income will be added to his other sources of income.
  2. Let's pretend Joe's money was in a RRIF instead of an RRSP and Joe had already received $5250 of income from monthly RRIF payments prior to his death.  On Joe's final tax return, there would be $5250 of RRIF income and then another $100,000 of income from the asset.
  3. Another common example comes from Real Estate, whether it's an investment property or a recreational property.  Let's pretend Elizabeth has an investment condo that she has owned and rented out for over 15 years.  When Elizabeth passed away on June 30th, her condo is deemed to have been sold for tax purposes.  Let's say she paid $150,000 originally for the condo and now it's worth $275,000.  There is a capital gain of $125,000 of which 50% is taxable. Elizabeth's final tax return would have to show net rental income for 6 months of the year plus the $67,500 of taxable capital gains.
  4. Stacy has a cottage at the lake that she inherited from her parents 22 years before she passed away.  The cottage has been in the family for multiple generations and rumor has it that the land the cottage was built on was originally bought for less than $1000.  When Stacy passed away at the age of 77, the cottage was deemed to have been sold for tax purposes for $850,000.  When she inherited the cottage the value of the cottage was $725,000.  Her parents would have paid for any capital gains prior to Stacy inheriting the property.  Stacy's final tax return needs to show the $67,500 of taxable capital gains (50% of $850,000-$725,000).
  5. The last example is for those that pass away with non-registered investments like stocks or mutual funds.  Barry worked for the same company for 32 years and as a result held $325,000 worth of stock of the company he worked for.  When Barry passed away, the stocks were deemed to have been sold for tax purposes.  the adjusted cost base (ACB) of the shares were calculated to be $110,000.  At death, Barry has $215,000 of capital gains of which 50% is taxable.  Barry's final tax return must show $107,500 of taxable capital gains plus and dividends he would have received from the beginning of the calendar year.

As you can see from these examples, the deemed disposition (sale of assets for tax purposes) can potentially trigger a lot of taxation.  In any of these examples, if there was a spouse as a beneficiary, there would be some rollover provisions where the tax may not be triggered now but deferred until later.

Are there other taxes on assets at death?

What we've talked about so far is the tax when you earn income.  Remeber that at death there is no tax on the asset but there is a potential deemed disposition of the asset for tax purposes.

In addition to income tax, provinces will have what is commonly known as probate fees.  Probate fees vary from province to province and are based on the total assets of the estate.  Let's use Jake's estate as an example:

  1. Personal residence = $590,000
  2. Bank account = $22,000
  3. Cottage = $225,000
  4. Non-Registered Investments = $85,000
  5. RRSPs = $90,000
  6. TFSA = $48,000
  7. Life insurance death benefit = $150,000

For probate purposes, assets with a named beneficiary like life insurance, RRSPs, and the TFSA are not included.  They are deemed to bypass probate with the direct beneficiary designation unless the designation is the estate.  In addition to these direct beneficiary designated assets, joint assets are typically not included for probate because the surviving joint owner becomes the owner of the asset.

So, in Jake's example, his total estate would be worth $922,000 (1+2+3+4)

If Jake Lived in Alberta, the total probate fees would be $525
If Jake lived in BC, his total probate fee would be about 1.4% of the total value of the estate = $12,900
If Jake lived in Ontario, his probate fee would be about 1.5% = $13,800
If Jake lives in Halifax, his probate fee would be about $15,000

As you can see, every province and territory has different probate fees.  TaxTips.ca has a great resource outlining all the current probate fees across the country.

Related Article: Understanding Taxes and Probate Fees

Putting it all together

So in Canada, there is no inheritance tax and technically no estate tax (where you pay a tax based on the total assets of the estate).  There is, however, income tax based on the final tax return of the deceased filed by the executor and probate fees determined by each of the provinces.  Probate fees and income tax are distinct and separate.  If we look at Jake's example, there would be income tax on the $90,000 RRSP at death but no probate fees on the RRSP if it had a direct beneficiary designation.

Estate planning and taxes can be complicated.  Because everyone's situation is different and unique it's always advisable to seek professional help from a financial advisor, accountant or lawyer.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites Group Benefits Online and Advisor Think Box.

23 Responses to Is there such thing as estate and inheritance tax in Canada?

  1. Great article. However, I believe if Jake dies in Alberta his Probate fee would not be $525. Instead, only the maximum of $400 would be payable

  2. Various provinces have different estate tax. These estate taxes can be avoided with some planning. Probate does not necessarily require legal services. We did the Probate on my mothers estate in BC. Bought a kit at Staples, read it a few times, and then completed the forms and submitted them to the court. Very simple. Three weeks later we had the release.

    Clearly the usual income tax returns etc are required.

  3. Great article.
    Can you expand on the RRSP? I have multiple RRSPs at different institution (some are multiple GICs). How can I make sure that all the RRSPs are transfer (tax deferred) to my wife directly (i.e. under her name) instead of going to the estate and being “cashed” then?
    Can I just add a line in my will or do I need to contact every institution and indicate my wishes?

    Thank you for the info you might find.

  4. As a retired lawyer one of the issues I found with RRSP’s which flow into an estate where there is no designated beneficiary is that not only does the money flow into the deceased’ return to date of death but typically even a modest sum will result in an increase in the tax rate to the maximum. So the typical retiree who enjoyed the benefit of a lower tax rate will see the estate hit with a significant tax liability..which will result in the beneficiaries exclaiming ” but Dad always paid his taxes!”

  5. awesome article lm dealing with the death of my dad so confused to what lm entitled to as the oldest daughter my third sister is looking after the will

  6. To save probate fees, some older people may decide to change title to the residence into joint tenancy with an adult child. This is probably a mistake since the parent may end up dispossessed of the residence to satisfy claims of creditors of the adult child or his/her spouse.

    • Good point and I generally agree. I’ve read however that 9 out of 10 seniors will be diagnosed with a terminal illness, so that could affect the decision. Also JWROS can create sibling problems.

      In BC probate is 1.4% so having the principal residence in the Will while costly, may be good insurance and the most prudent way to maintain estate harmony after death.

  7. So, based on the information in your article, please confirm the following: If my mom has a RRIF upon death and her spouse is deceased, can she designate her 3 children as equal beneficiaries of the RRIF (rather than the Estate) and therefore the RRIF distribution would not be subject to probate fees in BC?
    Thanks!

    • RIF and RRSP are only transferable to a spouse to avoid tax. Probate can be avoided if any beneficiary is named so it won’t go to the estate

      • So as to be clear, only a spouse can be named as beneficiary of an RRSP or RRIF. At the owner’s death, the monies are then transferred into the name of the spouse and income tax becomes payable once the spouse starts to draw any monies. So you have a delay in the payment of income tax, not an actual avoidance of income tax.

        • Quite right; it is a delay of income tax. Most spouses are likely to draw a similar amount that the deceased drew, increasing income tax proportionally, while avoiding the real whammy of taking the entire amount as income in a single year

          • Additionally, If you have a TFSA account you should name your spouse as “Successor holder”. This will avoid probate and allow the spouse to maintain the tax free status of the money.

            If you want to name children/Grandchild on your TFSA you can name them beneficiaries and state the percentage each is to get. This will also avoid the account being part of probate. They get the money tax free but cannot protect it from future investment tax unless they have room in their own account.

  8. There is an unfairness in the way the CPP is calculated with respect to the surviving spouse: the maximum CPP any one person can get is the maximum for a single individual.

    This means that if the surviving spouse was receiving less than the maximum, then he/she will have it topped to a maximum of (I think) 60% of the deceased spouse’s CPP. However, if the surviving spouse was already receiving the maximum, he/she will get NOTHING from the CPP as survivor benefits!

    In addition, the deceased spouses’s OAS is not going to be paid in any amount to the surviving spouse. The only possible help to the surviving spouse would come from the GIS if the surviving spouse is in quite a difficult financial situation.

    It is this scenario that MUST be taken into account in estate planning.

  9. No sure how we got onto CPP survivor benefits however. If the surviving spouse has their own CPP they will never under any circumstances get 60%. Because of the calculations it will always be significantly less.

    For example a relative of mine was getting his own 440.00 CPP when his wife died he only got 43% of hers.

    The only time a survivor gets 60% is if they don’t have and will never get a pension of their own. In other words the survivor never worked and contributed to CPP.

  10. Estate Tax. Call it what you want but the deemed disposition of assets and the payment of taxes upon death are estate taxes.

    The USA has “Estate Taxes” but only on amounts over 5.4 million. So if the deceased dies with a capital gain on investments they can be transferred to others… not just wife, at fair market value. However because they have the 5.4 million rule they also cannot just give money away during their lifetime. They have a gift tax. Since they have the 5.4 M amount its estimated to affect only the top .2% of the population.

  11. “If you want to name children/Grandchild on your TFSA you can name them beneficiaries and state the percentage each is to get. This will also avoid the account being part of probate. They get the money tax free but cannot protect it from future investment tax unless they have room in their own account.”

    Good tip, Dave.

  12. So if I am a resident of Ontario and the beneficiary of a notarial will for a deceased person who was a resident of Quebec, do I have to pay probate fees for Ontario.

  13. If a farm owner in Alberta (receiving annual rental income from the land) dies, and the farm is valued at say $500,000.00 does that mean the farm is also deemed to be sold at his death? If so, wouldn’t a life time capital gains deduction still be applicable?

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