What do I need to know about tax on my estate?

Some of you may already know that I write a quarterly column for News & Views, the magazine published by the Alberta Retired Teachers' Association. I'm attaching a link here to the winter 2012 issue, in which my column was called "What Do I Need to Know About Tax on my Estate?". Click here and scroll down to page 12.

Primer on cottage succession planning

Here in Newfoundland we're up to our knees in snow, and I'm sure it's much the same across the country. Nothing makes us dream of summer cottages and kayaking on a glassy lake like a good old Canadian winter. With cottages, lakes and fishing poles on our minds, it seems like a good time to consider the future of our summer hide-aways. Click here to read an article by lawyer Matthew J. Wilson that is a great primer on the issues you need to consider before taking any steps to leave your cottage to anyone. Those of you who have already made wills leaving your cottage to all of your children jointly (and I know you're out there), please read this article and ask yourself how realistic your plans really are.

Who should help an executor with estate tax returns?

A reader recently sent me the following question about who should be hired to prepare tax returns for an estate. It's a great question really, since we lawyer are always saying that executors should "hire an accountant" but not everyone knows where to turn.

Here's the question:

"What type of person should I be looking for to help me prepare terminal (and other tax returns) for my father who died last year? CA vs CGA vs CMA? I'm so confused."

I posted this question to my LinkedIn group called "Canadian Will and Estate Professionals" to see what the accountants in the group (and the other estate lawyers) would say about this. The general answer seems to be that an executor should look for a CA (Chartered Accountant).

However, every person who answered the post commented that the individual accountant's experience with estates and trusts is far more important than the letters after his or her name. I would agree with that.

In larger cities, you can get in touch with large accounting firms who have accountants working exclusively in different areas of tax, such as personal income tax, corporate tax, or estates/trusts. However, not everyone has access to a firm like that. When shopping for an accountant to help you with estate returns, ask how much experience the accountant has with estates. (Note that this is a different question than "do you do estate tax returns?")

You can also ask your estate lawyer for some names, as all of us work with accountants on our files on a regular basis.

One of the people who replied to my post suggested that executors avoid tax preparers, as opposed to accountants. This of course brought a reply from a tax preparer to counter that warning. My experience using tax preparers to work on estate returns hasn't been good. One of my clients who went to a tax preparer to have the deceased's terminal return prepared was told to "go away. You can't do a tax return for a dead person".

That of course was completely wrong; you can and should do tax returns for dead persons and their estates. This is why I agree with my colleagues' advice that the individual's experience is most important. Not all tax preparers are as poorly trained as the one that my client was unfortunate enough to encounter, by any means. Make sure you're comfortable with the expertise of the person to whom you trust your estate returns.

Passing the torch to the next generation

There's a good article in www.globeadvisor.com that talks about several issues relating to passing your estate on to your children. It covers a bit of everything, from choice of executor to life insurance, but the main topic is saving on taxes when passing on property. I wish more people would read articles like this one before going ahead with steps like putting their children's names on the cottage.  Click here to read the article.

Not knowing this simple tax rule causes problems in estates

I recently dealt with a question from a reader about paying "his portion" of the taxes on a RRIF, which he and another person are going to receive as they are the named beneficiaries of the RRIF. This is something that I hear very frequently, as it's commonly thought that a person receiving an asset must be the person who pays the tax on it. Unfortunately, this is not correct and it causes many problems and disputes in estates where executors don't seek professional guidance.

Let's say that the RRIF in question is worth $100,000, or $50,000 per beneficiary. Let's also say that the tax owing on the RRIF is going to be $30,000, or $15,000 per beneficiary. Plenty of executors (and beneficiaries for that matter) believe that this means instead of getting $50,000 each, the two beneficiaries are going to receive $35,000 each (50,000 - 15,000 = 35,000). This, however, is not the way the tax is paid.

What happens in reality is that each beneficiary receives his or her full $50,000. The $30,000 tax comes out of the estate itself. This means that the tax on the RRIF is paid from the bank accounts, investments, house or other assets owned by the deceased, even if the estate is being left to other people.

This is because the tax on the RRIF is a debt owed by the person who passed away. The RRIF itself is no smaller on the date of death, and so the whole thing must be given to the person(s) named. The law says that debts of an estate are paid from the residue of the estate first, so that's where the payment must come from.

Many people who do estate-planning without legal or tax advice never realize how easily their intent to treat everyone fairly can be upset by their failure to understand this rule. For example, let's say a mother leaves her $200,000 RRSP to her son, and the rest of her estate, which also adds up to about $200,000, to her daughter. She wants to treat them equally and thinks she has achieved this.

What she doesn't realize is that when she passes away, her son will get the whole $200,000 RRSP. The estate will pay the tax on the RRSP. Let's say the tax is $60,000. This means her daughter will receive $140,000. If there are other bills or taxes, the daughter will receive even less. This isn't even close to what the son will inherit, the mother's wishes don't go as planned, and it's quite possible that a dispute will ensue between the son and daughter.

The same rule applies to other assets that give rise to tax when the owner dies. For example, a person who owns rental properties or a lake cottage will also have tax to pay on death, and these taxes are paid out of the estate.

It's possible to draft a will to state that the person receiving an asset should also pay the tax bill associated with the asset, but almost nobody ever does that. I think more people would do that if they were only aware that it was possible. And if they were only aware of the rule in the first place.

How to reduce taxes on your final tax return

Dealing with tax is often one of the most mysterious and challenging aspects of an estate. I'm always on the lookout for good information and articles that help executors with this area. The following article was recently published in the Vancouver Sun. It talks the reader through an example of reducing capital gains tax on a typical estate. Click here to read the article by John Pin.

Take the Tax Sting Out of an Inherited Property

We hear a lot these days about inherited cottages and their tax implications. Attached is an article from the Globe and Mail's Tim Cestnick that will help clarify this issue. Click here to read it.

Most popular blog posts about tax

I always receive numerous questions about tax as it relates to estates, so in this post I'm gathering together a few of the most popular tax posts on my blog. Hopefully that makes your research a little easier. Click on the links below to read the posts.

The basics of capital gains tax and the principal residence

Income tax returns that an executor must file

Can the executor distribute the estate before getting a Tax Clearance Certificate?

Is money I get from an estate taxable?

Am I taxed when I inherit my parents' house?

How does forgetting about tax upset an equal distribution of an estate?

Does an executor have to pay estate taxes personally?

What if my Mom's name isn't on the house when Dad dies?

Do you ever wonder whether the legal documents and arrangements you've had in place for years need to be updated to suit your current situation? If so, you're not alone. Here's a question I recently received on this blog that is similar to many reader questions:

"My father has the house in his name only. My parents have been together for 60 years (and in the same house). Should my mother push to have her name added to the deed or is it assumed that after 60 years of being in the house it's considered hers too? My father's health is starting to fail and I just want to make sure everything is in place. He did leave her the property in his will, but not sure if that would cause tax issues?"

As your father makes these decisions about his property, here are some of the things he should consider:

If only one name is on a land deed, it will not be assumed that anyone else owns it. Not even a spouse of 60 years.

The contents of the house, on the other hand, will be assumed to belong to your mother if she outlives your father, and vice versa.

Depending on where in Canada your parents live, your mother might have a dower right to the property. That right only exists in a couple of provinces today. It gives a married person the right to live in the matrimonial property for the rest of his or her life, but it does not convey ownership. The spouse with the dower right could not sell or mortgage the property, which would eventually pass to the beneficiaries of the first spouse's will.

The fact that your father has left your mother the house in his will is good, as on the face of it this means that she will not lose her home should her husband pass away. She needs that peace of mind, as any of us would.

I don't believe that any tax issues would arise from this transfer, assuming that the house is your father's principal residence. From the information you gave me, I'm prepared to assume that it is his principal residence until I hear otherwise. Each of us is allowed to own and eventually sell/give away a principal residence without having to pay any tax on the transfer. So that means no tax to the estate because of transferring the house.

Your mother should not experience tax issues because of the house either, as Canadians do not pay tax on property we inherit from Canadian estates. This is not to say there will be no tax payable on anything in the estate; my answer is restricted to the tax situation on the house.

Please understand that I'm giving this answer with only a few words of facts. There could be other facts that affect the situation (for example, why is it in your father's name only anyway?). It never hurts to discuss tax questions with an accountant.

For the sake of completeness, I'll point out the downside of having the house only in your father's name and his leaving it to your mother in his will. First of all, debts and expenses of an estate must be paid before a beneficiary gets anything. If there are a lot of debts in the estate, it's possible the house would have to be sold to pay them. Secondly, the probate fee you pay at the court is based on the value of the estate. Some provinces, especially Ontario and BC, have high probate percentages, and if the house is in the estate (which it will be if it's in your father's name alone) it will increase the cost of probate.

These are all factors for your father to contemplate before making a decision about what is best for himself and for your mother.

You said your father's health is failing. If this means that his mental health has begun to deteriorate, it may soon be too late for him to make legal documents dealing with his property. He doesn't need perfect mental abilities of course, but he does have to be able to understand what he is doing, and the effect his actions will have on his family. If he is going to make changes, it will have to be done soon.

I'm really glad that you're helping your parents by openly discussing these issues with them and finding the information they need. I hope my answer helps with the decision-making process.

Selling Mom's estate? Know the tax rules

This question-and-answer article about capital gains tax was found on http://www.capitalmagazine.ca/ and was originally published at http://www.montrealgazette.com/. This is exactly the kind of question I'm frequently asked by readers on this blog, so I'm sure many of you will be interested in the article. Click here to read it.

Is a beneficiary liable for capital gains tax on a property incurred before he received it?

We all want to know what effect, if any, an inheritance will have on our tax situation. The following is a question received on my blog but it's also one that I'm asked a lot in seminars. I thought I'd share it with you. Here is the question:

If a person inherit a revenue property that was originally purchased many years ago for 100k and is now worth 300k when the beneficiary (that person that inherited)eventually goes to sale the property - say it will be sold for 350k, is he subject to a full capital gain tax, going back to the original purchase price of 100k or just on the gain made from the day he was an owner (50k)?

The fact that the property in question was a revenue property is signficant because it means that the property will be subject to capital gains tax. Let's say the property belonged to Jesse. If it had been Jesse's principal residence, it would have been an exception to the capital gains tax rule, but as it was a revenue property, it will be taxable.

Jesse is responsible for tax on the gain in value from the day he purchased it ($100,000) until the day his estate disposes of it ($300,000). This tax is paid from Jesse's estate. Jesse's executor may not transfer the asset to anyone until the taxes are paid unless he is prepared to risk having to pay those taxes himself.

The property then passes to the beneficiary. Let's call her Laura. When Laura receives the property it's worth $300,000 and when she sells it, it's worth $350,000. Laura is responsible for the tax on this increase in value (i.e. capital gain) only. If I were Laura, I'd want reassurance from the executor of Jesse's estate that all outstanding taxes on the property had been paid in full.

Please understand when reading this post that I have simplified the example to describe how the general rules work. Sometimes there is a delay in an estate and the property ends up sitting in the estate for many months, during which time it increases in value. A beneficiary could be responsible for those taxes. I suggest that executors use experienced estate accountants to deal with capital gains tax questions.

An entrepreneur's guide to giving wealth away

I always like finding articles that can talk about tax in plain language. The attached is one of those, and author Tim Cestnick does a great job explaining how owners of small businesses can get tax breaks both in their lifetimes and at the time of their deaths. Click here to read the article from the Globe and Mail.

Inheritance up in flames

As a follow-up to the article I posted right before this one (tax on inheritance) I'm attaching a link to an article in http://www.capitalmagazine.ca/. It's the true story of a family in BC who didn't get tax advice before giving the parent's home to the children as an estate-planning move. After the parents died, this ended up costing the children $700,000 in tax. Whew, not at all what the parents had hoped for. Click here to read the article, especially if you think you don't need legal or accounting advice for estate planning.

Income tax on inheritance

Are you wondering about a potential tax hit if you inherit money or property? If so, you're not alone. This remains one of the consistently asked questions here on this blog. Today I'm linking you to a blog post by Mark Goodfield, a Toronto accountant also known as The Blunt Bean Counter. To read his post about income tax on inheritances in Canada, click here.

Does an executor have to pay estate taxes personally?

The toughest part about being an executor is the learning curve; most executors do the job only once during their lifetimes and frankly most are happy not to have to repeat the role. It may seem relatively straightforward to say that the executor is in charge of the estate, but the details can be very challenging. Tax issues are particularly challenging. A reader has a question about executors and taxes that I thought everyone would find useful:

"My brother is the executor for our father's estate. He left us a RRIF to each of his children (and common law spouse) which is not considered part of the estate. There are potentially large taxes to pay on this plus other taxes. Who is responsible to pay? If there is not enough funds in the estate is the executor responsible for outstanding debts/taxes? He fears he may be made bankrupt from his personal savings."

You're right that assets with designated beneficiaries, such as a RRIF (also including RRSP, life insurance policies, pensions, LIRA, etc) do not fall into the estate. They are paid directly to the beneficiary named.

You're also right that there could well be a big tax hit on the transfer. Money that is contributed to a RRIF is put in on a tax-deferred basis. The income tax is paid on it when the money is taken out of the RRIF. The law says that when you die, your RRIF is deemed to be cashed one minute before your death. Therefore all of the money comes out at once, and the tax all becomes owing.

The portion of the RRIF that is going to your father's common-law wife may be eligible to be rolled over to her without tax being paid.

The taxes must be paid by the estate, even though the RRIF money didn't go into the estate. This is often hard for people to accept, because it may not seem fair that the people inheriting the residue are the ones who basically are paying the tax. However, the tax on the RRIF is a debt of the deceased and his estate is responsible for his debts.

Your brother should work with an accountant or lawyer who specializes in estate and tax matters to ensure that he becomes aware of all elections, deductions, carry-overs or other tools that might be available to minimize the taxes.

Should an estate not have enough assets to pay the taxes, the executor is not personally responsible for paying them. His job is to administer the deceased's affairs, not to involve his own money. This is just one more reason executors are always advised to keep their own funds strictly separate from estate funds. Unless he has been fraudulent or negligent in his administration of the estate, he should have no fear of damaging his own finances.

I appreciate you taking the time to send me a question. Please understand that these are the general rules that apply to estates and taxes, and that specific facts in your case could conceivably bring about a different result. I strongly urge your brother to seek professional guidance.

Photo from http://www.dreamstime.com/

How much inheritance tax do I pay in Canada?

I continue to receive dozens of questions about inheritance tax, so clearly this is a topic that needs to be mentioned in this blog more often. Most of the time, the question appears to be from an individual who is inheriting something (as opposed to an executor or someone planning their own estate) so I'll concentrate on that perspective today.

The good news is that if you are a Canadian resident and inherit something from a Candian estate, you don't have to add anything to your tax return. You aren't taxed on what you receive.

This is not to say that the estate won't have to pay any taxes before it releases your inheritance to you. You could inherit less from the estate because tax has to be paid by the estate. For example, you and your brother are the only beneficiaries of your parents' estate. The estate includes, among other things, a house and a cottage. There is no tax on the transfer of the house but there IS capital gains tax on the transfer of the cottage. The estate has to pay that tax, not you. Debts have to be paid before beneficiaries can be paid. So if other assets in the estate such as the savings account are used to pay the cottage taxes, there is less in the estate to give to you and your brother.

Having said all of that, if the will specifically says that you as a beneficiary are to pay the taxes on a certain asset, then you will have to pay them to receive the asset, rather than the estate pay them. This is pretty rare, but certainly happens from time to time.

A mistake that some beneficiaries make is to believe that the house they inherit from their parents is "tax free" and always will be no matter what they do. They think this because they inherited it without having to pay tax, and without the estate having to pay tax. However, when the beneficiary later decides to sell the house, he or she could well have to pay tax at that point.

For example, you inherit the house from your parents, which is valued at $300,000. You get that tax-free. You already live in your own home, which is your principal residence. A couple of years later you decide that you really don't want to hold on to your parents' home any longer, so you sell it for $350,000. Because your parent's home is not your principal residence, you have to pay tax on the increase in value. The increase was $50,000, so you would have to add half of that, or $25,000, to your income tax return as income in the year you sold the house.

Please note that I'm simplifying the general rules here for the purpose of illustration, and an accountant can give you much more detailed information on your specific situation.

Purchasing a vacation property in the US

Many Canadians are thinking about buying vacation homes in the USA. If you're one of them, would you be interested in knowing what a Canadian accountant with 25 years of experience might say about it? If so, click here to read this article by Mark Goodfield, an accountant who blogs at http://www.thebluntbeancounter.com/ . Photo from http://www.dreamstime.com/ .

Capital gains tax on homes passing to the next generation

Capital gains tax continues to be something that requires a lot of attention in estate planning. This is another excellent question from a reader that deals with capital gains tax. I'd like to share it with you.


Hi Lynne, You mention that houses passing to children are not taxable. What about houses which pass to a niece and nephew? Is there any difference. I am referring to adults when I say niece and nephew.Both have their own principal residences and would probably rent or sell the houses in question.There are 2 houses in question. One is the decedents principal residence and 1 is a rental property.Appreciate your help. Thanks


The statement "houses passing to children are not taxable" is an over-simplification of what I've said, and isn't accurate. Let me clarify that. There is no capital gains tax on a transfer of a deceased person's home to someone else if that home was the deceased's principal residence. It doesn't matter whether the person receiving the home is a child, niece or nephew, as the key element in the transaction is the fact that it's the deceased's principal residence.


If the house being transferred was not the principal residence but was a cottage or rental property, it is subject to capital gains tax, even if it's being given to the deceased's own children. So  you'll find that the two houses in this reader's question will be treated differently by Canada Revenue Agency no matter who they are given or sold to.


The reader mentions that the niece and nephew each already has a principal residence of his or her own and will probably rent or sell the house they receive, which seems likely. When the niece or nephew sells the house they receive from the estate - whether that is done within months or not until years later - that niece or nephew is going to have to deal with capital gains tax as the extra house is not his or her principal residence. The capital gains tax will apply to any increase or loss in the value of the house from the time the niece or nephew received it until the time it is sold.


These are the general rules of capital gains tax. The reader would probably benefit from a one-on-one discussion with an estate planning lawyer or tax accountant to learn more about how the capital gains tax will affect the situation.

Probate fee planning - income tax, estate & legal issues to consider

This excellent article comes from Mark Goodfield, an experienced accountant who blogs at www.thebluntbeancounter.com. It goes into tax and legal consequences of the various ways that people try to avoid probate fees. It's a really good read if you are wondering about how probate fees might affect your plans. Click here to read it.

Why holding the family cottage in a trust can make sense

The question about how to pass the family cottage on to the next generation continues to generate quite a bit of discussion. I found the attached article from Tim Cestnick of the Globe and Mail really useful. It explains the benefits of holding the cottage in a trust while you're alive. Click here to read the story.