If you received an inheritance or are planning to leave one, you might be wondering: Is there an inheritance tax in Canada?

Money received from an inheritance is not considered taxable income in Canada, but that doesn't mean your inheritance is immune from taxation. The estate of the deceased is responsible for paying taxes, not you (the beneficiary). This includes the Canada capital gains tax, which is part of the overall income tax and applies to various assets. For example, the capital gains inclusion rate determines how much of the capital gains is taxable.

The federal government has established these rules to ensure that taxes, including capital gains tax, are collected efficiently and fairly.

In other words, any inheritance you receive is not considered taxable income for you because it has already been taxed.

Key Takeaways

• There is no inheritance tax in Canada, meaning the beneficiaries receive an inheritance tax-free. The estate of a deceased person pays any tax owed to the CRA.
• All income earned by a deceased person is taxed on their final tax bill, but in certain situations, it is possible to defer those taxes.
• In addition to the final tax bill, the estate of a deceased person is responsible for paying for probate, a legal proceeding that is required before the estate assets can be distributed among its heirs
• Probate fees vary by province and depend on the total value of the deceased's estate

Understanding Inheritance Tax: Does it exist in Canada?

There is no such thing as an inheritance tax in Canada. This means if you receive an inheritance, you won’t have to pay any capital gains tax on the inherited amount. However, the estate of the deceased is responsible for paying any capital gains tax owed to the CRA. Individuals must pay capital gains taxes when assets are sold, whether gifted or inherited, depending on ownership changes and the fair market value at the time of transfer.

After an individual passes away, the CRA ensures that capital gains tax is paid on any taxable income they earned up to the date of their death. The estate executor is responsible for filing what is called the final or terminal tax return. If there is a capital gains tax balance owing, the executor pays it off from the assets of the deceased’s estate. Once the final tax bill is settled, the rest of the assets can be distributed among the heirs.

For example, let’s say Martina passes on July 31, 2023. Since Martina had filed taxes for 2022, she doesn’t owe any tax on income earned up till Dec 31, 2022. But what about her earnings between Jan 1, 2023, and her date of death? As the tax filing deadline isn’t until April 31, 2024, Martina will not have to file taxes for the income she earned between Jan and July of 2023.

In this scenario, the executor of Martina’s estate needs to file a deceased capital gains tax return before the tax filing deadline, which includes any capital gains tax owed on her assets. Whatever capital gains tax is owed by Martina will be paid from the funds in her estate.

How are assets treated for income tax purposes after death? 

When a person passes away, all of their assets, such as real estate, land, investments, etc., are considered to have been sold just before death for tax purposes. Since different assets will generate income differently, they are also taxed differently, with capital gains taxation playing a significant role in how investments and other appreciating assets are treated.

How are non-registered capital assets treated for capital gains tax purposes?

Non-registered capital assets, such as investment accounts offered by financial service providers, are deemed to be sold at a fair market value immediately before death. Fifty percent of capital gains from the sale of non-registered assets is added to the deceased’s taxable income, which is taxed at their personal income tax rate. This fifty percent is known as the capital gains inclusion rate.

Here’s an example: Robert passed away with $200,000 of stocks held in a brokerage account. Because his adjusted cost basis is $140,000, his estate has a capital gain of $60,000. Robert’s estate executor will have to pay capital gains taxes on the 50% of this capital gains(i.e. $30,000) when he files the deceased tax return.

‍

Exceptions

If you have a spouse or a common-law partner, you can transfer capital property to them at the adjusted cost basis upon your death. Doing so means you will not receive capital gains (or incur a capital loss) in your final capital gains tax return.

In other words, naming a spouse or a common-law partner as a beneficiary on a capital property allows you to defer taxes until the beneficiary sells the property themselves. 

Continuing with the example above, let’s say Robert had designated his spouse, Kyla, as the beneficiary of his brokerage discount account. This means after his death, the stocks held in his account will get transferred to Kyla at the adjusted cost basis of $140,000. As a result, Robert will not have to pay capital gains tax on the unrealized gains of $60,000 on his final tax return. 

How are registered capital assets treated for income tax purposes? 

The value of your registered capital gains, such as RRSP and RRIF, is reported as taxable income that includes capital gains tax in your final tax bill. The lifetime capital gains exemption can provide significant tax benefits by allowing entrepreneurs to minimize their taxable income upon the sale of their businesses. The lifetime capital gains exemption can also potentially facilitate further investments. This amount is fully taxable at your personal tax rate. Your estate executor is responsible for paying the taxes, meaning the beneficiary of a registered account will receive the funds tax-free.

Let’s say Neil has $80,000 in his RRSP. Upon his death, the full balance of the RRSP will be deemed to have been sold, resulting in an income of $80,000. This amount will be listed as taxable income on Neil’s last tax return.

Find the best rates

Compare quotes from Canada's top life insurance companies in no time.

Compare Rates

Exceptions

With respect to RRIF and RRSP investments, it is possible to defer taxes by naming an eligible person as the beneficiary. Taxes will be deferred if the beneficiary is: 

• Your spouse or common-law partner
• A financially dependent child or grandchild under the age of 18
• A financially dependent physically or mentally infirm child or grandchild of any age

Canada’s Inheritance Tax Rates

All income earned by a deceased up to death is taxed on their final tax return.

The value of non-registered assets is considered to be sold at the fair market value prior to death. Fifty percent of capital gains are added to the deceased’s income, which is taxed at their personal tax rate. Eligible capital gains can provide substantial capital gains tax benefits, allowing heirs to strategically allocate resources and potentially reinvest in their businesses.

The total value of registered accounts, such as a RRSP, is added to the deceased’s income and is taxed at their personal rate.

Inheritance Tax Exemptions

If your spouse or common-law partner is inheriting your estate, many estate taxes will likely be deferred; then the principal residence exemption would be useful here. The principal residence exemption can also play a crucial role in avoiding capital gains taxes on a deceased individual's primary residence. However, for the principal residence exemption to happen, you must be a Canadian resident. In addition, for the principal residence exemption to happen, the estate must be transferred to your spouse or common-law partner within 36 months of your passing.

Income taxes may also be deferred in certain other situations. For instance, if the beneficiary of a registered account is a qualified survivor, the capital gains tax on the value of this asset will not be triggered now.

What are Probate Fees?

When a person passes away in Canada, their estate will likely go through a legal process called probate. In simple terms, probate is a legal procedure that confirms a written will is valid before it’s carried out. 

How much probate costs depends on your province of residence and the total value of your estate. The more property you have in your estate when you die, the higher the probate fees. Generally speaking, probate fees can be anywhere between $0 to $1.7% of the value of your estate.

In some provinces, probate is free for smaller estates. For instance, in British Colombia, probate is free of cost for estates with a value of less than $25,000. 

Probate fees are paid by the estate of a deceased and can be quite hefty for large estates. Fortunately, there are steps you can take to reduce the probate fee and prevent it from eating up a sizable portion of the inheritance you want to leave behind. 

• Assets held in designated beneficiary accounts can bypass probate. So if you have an RRSP or TFSA, make sure you name someone other than your estate as the beneficiary. The same goes for a life insurance policy. Life insurance proceeds do not require to be probated, as long as the beneficiary is not the estate.
• When it comes to life insurance, it is always a good idea to designate a contingent beneficiary as well. The contingent beneficiary is the person or entity who receives the payout if the primary beneficiary dies first. Having a contingent beneficiary means the death benefit will bypass probate even if the main beneficiary predeceases you.
• Otherwise, if the primary beneficiary passes first and you don’t update the beneficiary designation and there’s no contingent beneficiary, the proceeds of your policy will go to your estate and must be probated. 
• Hold bank accounts and property jointly with a spouse. In the event of your death, the surviving spouse will inherit the asset directly without the need of probate.
• Gifting assets to your beneficiaries while you’re still alive can help reduce the total value of your estate upon death.

Probate Fees in Different Canadian Provinces

Probate fees in Canada vary by province, with British Columbia, Nova Scotia, and Ontario charging the highest fees. Here are the probate fees for all provinces and territories for estate assets worth $1 million and $2 million. 

‍

Conclusion

There is no inheritance tax in Canada, meaning the beneficiary of an inheritance receives it tax-free. The estate of a deceased — not the beneficiary — is responsible for paying any taxes owed to the CRA. In addition to income taxes, the deceased person’s estate is responsible for paying the probate fee, which varies by province and is based on the total value of the estate. 

If you have any questions about estate planning, book a call with a Dundas Life licensed advisor today.

Frequently Asked Questions

Who is responsible for paying the taxes on an estate in Canada?

The executor of the estate is responsible for paying any amount of taxes owed by the deceased. The executor must pay off the capital gains tax balance owed before the estate can be distributed among the heirs. 

Are all assets of the deceased considered for taxation?

Yes, all assets included in an estate are considered for taxation upon death. All assets included in your estate, such as real estate, investments, businesses, land, and RRSPs, are considered to be sold for fair market value at the time of death. Since different assets generate income differently, they are also taxed differently.

For example, capital gains from non-registered capital are taxable at 50% of the deceased’s marginal rate. In contrast, if you have an RRSP account, its total value at the time of death gets taxed at your personal rate. 

What happens to RRSPs, RRIFs, and TFSAs when the account holder dies?

From a capital gains tax perspective, the fair market value of the RRSP or RRIF at the date of death is included in the income of the deceased and taxed at their personal income tax rate. However, it is possible to defer paying income tax including capital gains tax by naming one of the following: 

• A successor annuitant
• A financially dependent child or grandchild as the beneficiary
• Your spouse or common-law partner as the beneficiary

As far as the TFSA is concerned, the fair market value of it at the time of death is considered to be received tax-free by the holder and as such is taxed at their personal rate. Designating a beneficiary on a TFSA or naming a successor holder doesn’t impact the tax treatment upon death. 

What happens if the deceased owed taxes upon death?

If the deceased owes any income tax, their estate administrator is responsible for paying it out of the assets of the deceased’s estate. The executor must pay off the final tax before the estate can be distributed among the heirs.