Is there tax charged on death?

There is no inheritance or estate tax in Canada. However, any capital property owned by the deceased is deemed to have been disposed of at fair market value immediately prior to death. The deemed disposition triggers the realization of any accrued capital gains or unrealized capital losses. Any disposition of capital assets (including deemed dispositions) made in the year prior to death must be reported on the deceased’s final tax return. The final tax return must be filed for the deceased by the executor or administrator of the estate.

What is a “deemed disposition” and why does it matter?

When someone dies, the government treats any property or items owned at the time of death as though it was sold immediately before death. For example, if the deceased owned stock, it would be treated for income tax purposes as though the stock was sold on the day the person died.

In many cases, this deemed disposition of property triggers additional capital gains tax to be included in the deceased’s final income tax return.

The deemed disposition can be deferred until the date of death of a surviving spouse or common-law partner if the deceased’s assets pass directly to the spouse or common law partner, or to a Qualifying Spousal or Common-Law Partner Trust (“QST”) for their benefit.

What is a QST?

A QST allows an individual to provide for a surviving spouse or common-law partner during their lifetime and to have any remaining assets transfer to the original testator’s chosen beneficiaries (e.g., children from a first marriage). The surviving spouse or common-law partner must be entitled the QST’s annual income and can (but need not) be able to access the assets of the QST during their lifetime.

Detailed estate taxation planning – including setting up a QST – should be undertaken with the assistance of a licensed professional such as a TEP.

How are capital gains taxed?

A capital gain is the excess of the fair market value on the deemed disposition date and the adjusted cost base (i.e., the purchase price plus any capital costs) of the property. Conversely, a capital loss is the excess of the adjusted cost base over fair market value. Currently, only 50% of any net capital gains (i.e., capital gains less capital losses) are subject to tax at the deceased’s marginal tax rate, which is dependent upon their other income for the year of death.

Not all capital gains are subject to taxation. If a property would have qualified as the taxpayer’s principal residence, the principal residence exemption may be available to reduce or eliminate capital gains realized on the disposition of that property. If the property is shares of a qualified small business corporation or qualified farming or fishing property, the capital gains exemption may be available to reduce the amount of capital gains tax.

Will my beneficiaries have to pay tax when I am gone?

In most cases, inheritances are received after-tax and the beneficiary acquires the property at a cost equal to the deceased’s deemed disposition value. For instance, if a beneficiary is left a house, they will pay no tax on receiving the property. Once the house is in their hands, they will be liable for standard taxes such as property tax and income tax if the house is sold at a profit and was not their principal residence.

Note that some jurisdictions outside Canada tax beneficiaries by way of an inheritance tax. As such, it is possible that a beneficiary may be subject to an inheritance tax, and the Canadian estate will be subject to capital gains tax on the deemed disposition of assets. A beneficiary residing in a foreign jurisdiction should contact a licensed tax professional for advice on how different tax systems will impact estate planning.

How are my RRSPs or RRIFs taxed when I die?

When the holder of an RRSP or RRIF dies, the remaining balance is treated as ordinary income to the deceased in the year of death from a tax perspective. If the RRSP or RRIF can be transferred to a surviving spouse or common-law partner, taxation of the RRSP or RRIF can be deferred until the death of the survivor.

What are Probate Fees / Estate Administration Tax?

Probate fees (known in some provinces as probate tax, probate charges, or estate administration tax) are fees or taxes charged in relation to obtaining a grant of probate (or Certificate of Appointment in Ontario). The name of the fee/tax and amount of tax charged varies from province to province and territory to territory.

Are there any exemptions from Probate Fees?

The list of items and estates eligible for exclusion from probate fees varies from province to province. Estate planning can be undertaken in certain provinces to minimize probate fees through the use of Multiple Wills. For more information on probate exclusions and rates, please refer to the “What is Probate?” and “Probate by Province” sections of this website.

For further information or assistance in drafting a Will, please consult a TEP.