We often hear that the only things we can’t avoid are death and taxes. In Canada, as in many countries when someone dies, there are almost always taxes to pay. Many countries have what is called inheritance tax (or death duty). This is where the heirs who inherit money or other assets must pay a percentage of the assets’ value to the government (there can also be an inheritance tax on property).
In the UK, for example, inheritance tax is 40% of the amount above the threshold, which is currently around $600,000. In Japan, inheritance tax can be as high as 55% on amounts above the threshold of around $350,000. Inheritance tax is typically paid by the recipients of the inheritance. There are often exceptions, where spouses don’t have to pay any inheritance tax, or other close family members may pay less than the full amount.
Inheritance tax in Canada does not exist as such, nor is there Canadian inheritance tax on property, however some taxes usually must be paid when someone passes away. So, is inheritance taxable in Canada? It can be, but it is not the heirs who will pay it. Let’s take a closer look at Canadian inheritance tax law.
How is inheritance money taxable in Canada?
So, if inheritance tax doesn’t exist in this country, how is inheritance taxable in Canada? When someone dies in Canada, the executor of their will has to file a deceased tax return on their behalf (the executor is the person chosen by the deceased to carry out the wishes outlined in their will — this is typically a close family member).
Firstly, the tax return needs to detail all the income that the deceased earned in the tax year of their death. This could include:
- Employment income
- Self-employed income
- Retirement pension income
- Canada Pension Plan
- Old Age Security
- Investment income (interest and dividends in non-registered accounts)
What are the taxes on inheritances that are assets?
As regards any assets that the deceased may have owned (for example, property, investments, Registered Retirement Savings Plans and Registered Retirement Income Funds), this is where it can get a little complicated.
These assets are typically classified as having been “sold” upon the deceased’s death, at their “fair market value,” which is what the CRA considers the assets to be worth at that time. Half of the capital gains on unregistered assets (assets that are not held in registered accounts, such as RRSPs or Tax-Free Savings Accounts) can be added to the deceased’s total income for the year.
A capital gain is when you sell an asset for more than you originally bought it. So, for example, if the deceased bought mutual funds for $10,000, and they were worth $20,000 when they died, the capital gain would be $10,000.
Are inheritances taxable for property?
While there may not be an inheritance tax in Canada, nor a Canadian inheritance tax on property, there are some instances when a deceased’s property could be taxable.
The deceased’s primary residence would not be subject to any capital gains, but a second property, investment property or vacation home could be. What are the taxes on inheritances of property? As much as half of the capital gain of each property could be considered income and taxed accordingly.
Is inheritance taxable in Canada for close relatives?
There are a number of tax exemptions for inheritance for certain family members. When it comes to spouses or common law partners, much of an inheritance may not be taxable.
If the spouse has been named a beneficiary of the deceased’s RRSP or RRIF, the assets within these accounts can be transferred to the spouse without an immediate tax consequence (though the spouse could pay tax on any future withdrawals from these accounts). The same could also apply to a financially dependent child or grandchild under 18, or a mentally or physically infirm child or grandchild of any age.
If a spouse is also a co-owner of a property, there should not be any tax to be paid, even if there is a capital gain.
How much tax do you pay on an inheritance?
Once the total amount of the deceased’s “income” has been calculated (including any potential capital gains, etc.) tax will be calculated at the relevant tax bracket. The executor will have to pay the tax bill from the deceased’s estate assets. The remainder of the estate will be passed on to the named heirs, who do not have to pay inheritance tax in Canada.
Will my inheritance be taxed?
That depends on your relationship to the deceased, and what kind of assets they left in their will. Most spouses will find that the majority, if not all of their spouse’s assets will not be taxed. Other relatives may find that their inheritance is reduced if their deceased relative had unregistered assets or real estate that made considerable capital gains.
While there may be no inheritance tax in Canada (or Canadian inheritance tax on property), when someone dies, their estate has to pay probate fees to the province of residence, which can be thousands of dollars.
Probate fees can vary greatly from province to province but are usually based on a percentage of the value of the deceased’s assets, which can include cash, real estate, investments and bank accounts.
Exceptions vary but usually include jointly owned real estate, joint bank accounts and investments with beneficiaries (such as insurance, RRSPs and TFSAs), all of which are typically not subject to probate fees.
Giving an early inheritance with a reverse mortgage
Now you know what amount of inheritance is taxable in Canada, you will have a better idea of what your heirs can expect to receive. However, homeowners aged 55-plus can also give an early inheritance to their family members by taking out a reverse mortgage. A reverse mortgage allows you to borrow up to 55% of the value of your home, with no regular mortgage payments to make. You only pay back what you owe when you move out or sell your home.
There are a number of advantages to gifting money from a reverse mortgage to your family members:
- The money is a gift and therefore not taxable
- Your family members get to use the money from their early inheritance at a time when they probably need it the most
- You get to enjoy seeing your family members benefit from your money
Call us today at 1-866-522-2447 to find out how much you could borrow to give to your family as an early inheritance.