Monday, March 28, 2011

How much are Canadian inheritance taxes?

The intricacies of the Canadian tax system are a mystery to almost everyone. Lawyers involved in estate planning, like myself, spend quite a bit of time learning about how taxes apply to estates, and staying current with changes. So I'm not at all surprised that one of the questions I'm asked most often is about how much tax a beneficiary has to pay on an inheritance.

The answer is relatively simple for once. A beneficiary living in Canada who receives an inheritance from an estate in Canada is not taxed on the inheritance. Hooray!

This doesn't mean that taxes won't affect a beneficiary indirectly. When there are taxes to be paid by a deceased, such as capital gains tax on real estate, or income tax on an RRSP, those taxes are paid out of the estate. This means that a beneficiary who is inheriting the estate is going to inherit less because the taxes have taken a chunk.

Also, the fact that something transferred tax-free to a beneficiary doesn't necessarily mean that there will never be any tax associated with that asset. For example, your mother passes away and leaves you her house. There is no capital gains tax on the transfer to you because it was her principal residence. You already have a house that you live in, so you rent it to someone for a couple of years while you decide what to do about it. Eventually you decide to sell it. If the house increases in value over that couple of years, you will have to pay the capital gain tax on the increase.

Perhaps there are no simple answers to tax questions.

9 comments:

  1. Do I have to pay taxes on money which I receive after passing from my mother in the Netherlands? I do have to pay in the Netherlands but what happens if I transfer that money to Canada. Or only part of it and some more in the future. I'll leave a big part on my Dutch banking account. Thanks for addressing this.

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  2. If there is no inheritance tax then what are probate taxes? My lawyer just last week said that probate taxes are what many refer to as death taxes.

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    Replies
    1. Hi Luis.

      An inheritance tax is something you would have to pay yourself out of your own pocket on something you inherited.

      A death tax is something the estate has to pay.

      Lynne

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  3. Can an estate plan be reopened at a later date to make changes

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    Replies
    1. Certainly! An estate plan is a flexible thing that changes as your life and financial means change. I always tell my clients that their wills should primarily aim at covering the next five years, and that they should periodically review their wills and the rest of the estate plan (power of attorney, health directive, beneficiary designations, joint property ownership, insurance) to make sure that it stays relevant.

      Lynne

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  4. what if i am a canadian citizen who inherts property in another country?

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  5. Hello Lynne,

    I have the same question as the Anonymous post from June 21 2013.

    Background: I have Canadian and British Citizenship and my father living in the UK passed away. He has left us a few properties. Everyone else lives in the UK but me. What are the best options for me? Rent out the properties with the rest or should we sell all the properties. What would be best for me living in Canada?

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  6. Hi, thanks for this info. Living in Ontario, I sure wish I'd read it this time last year. I just heard back from CRA and they're not going to reimburse me the $10k in taxes I paid on inheritance money I didn't know wasn't taxable!

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