What is inheritance tax?
It should be noted that there is NO inheritance tax in Canada as of 1972, however a provision on capital gains was added. What CRA does is it treats the estate as a sale, unless the estate has been inherited by a living spouse or common-law partner. And of course, there are always exceptions, but this is the general rule. Any taxes that are owed are then paid for by the estate and not the beneficiaries. So, by the time the estate is settled, the beneficiaries shouldn’t have to worry about paying taxes.
Inheritance tax is very different to capital gains tax. More information about capital gains tax can be found here.
How do Canadian inheritance tax laws work?
(Straight in from Turbo Tax Canada)
- “When a person dies, their legal representative, the executor, has to file a deceased tax return to the CRA. The due date of this return depends on the date the person died. Any taxes owing from this tax return are taken from the estate before it can be settled (dispersed).
- Once the executor has settled the estate, they must ask the CRA for a Clearance Certificate which confirms all income taxes have been paid or that the CRA has accepted security for the payment. As a legal representative, it is important to get this clearance certificate before distributing any property.
- If you do not get a certificate, you can be held personally liable for any amount(s) the deceased owes.”
If the estate is inherited by a surviving spouse or common-law partner, how does this work?
- Any non-registered capital property may be transferred to the spouse or common-law partner of the deceased tax payer.
- For any registered assets (i.e. RRSPs & RRIFs), the deceased person is deemed to have received the fair market value of his or her plan assets immediately prior to death. This amount must be included in the income of the deceased person’s tax return.
- It is possible to defer income tax if an eligible person has been designated as the beneficiary of the RRSP or RRIF. This includes a spouse or common-law partner, a financially dependent child or grandchild under 18 years of age or a financially dependent mentally or physically infirm child or grandchild of any age.
There are other exceptions that can be taken into consideration. For further information visit: Turbo Tax Canada
To sum it all up
This straight from CBC News: “Right now, if you die at 85 and bequeath a cottage lot you bought for a few thousand bucks to the grandkids, you (or, rather, having passed on, your estate) must pretend you sold it at the $500,000 it is worth today, treat that notional increase as capital gains and pay the appropriate tax. Same applies to other assets. And, sorry, no $5-million minimum.”
So that’s it folks. There is no ‘official’ inheritance tax, however capital gains tax will most likely apply and is not something that you can just sneak around. For further information directly from CBC News click here.
Need information regarding the new taxes owed on properties? Check out our blog post here.
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