A common belief among Canadians is that they will be taxed on money they inherit. However, Canada does not impose an inheritance tax. Instead, after someone passes away, their final tax return must be filed, covering the income they earned up to the date of death. Any taxes owed are paid from the estate’s assets before the remaining funds are distributed to the beneficiaries.
While there isn’t an inheritance tax in Canada, other costs are associated with settling an estate. It’s important to understand these costs and how the process works.
Canada doesn’t have a traditional estate tax, but there are taxes and fees that apply after death. The Canada Revenue Agency (CRA) ensures that taxes are paid on any income earned up to the date of death. If there is a tax balance owing, the executor of the estate must file a final tax return and settle any outstanding taxes.
Earned Income
When you pass away, any earned income up to the date of death is included in your final tax return. This includes salary, wages, and other forms of income earned before death.
Deemed Disposition
Deemed disposition occurs when all your assets are treated as if they were sold at their current market value upon death. This means the difference between the original purchase price and the market value at the time of death is considered a capital gain.
Capital Gains:
If your assets have increased in value, the difference (capital gain) is taxable. Effective June 25, 2024, 50% of this gain is included in your income unless the total gain exceeds $250,000, in which case any amount above the first $250,000 the inclusion rate increases to two thirds.
What Property Does Deemed Disposition Apply To:
Deemed Withdrawal
Deemed withdrawal applies to registered accounts such as RRSPs and RRIFs. The total value of these accounts is added to your income for the year of death, potentially leading to a significant tax liability.
Example: Earned Income, Deemed Disposition, and Deemed Withdrawal (Effective June 25, 2024)
Let’s consider an example to illustrate how earned income, deemed disposition, and deemed withdrawal work together, including how much of the estate is kept after taxes and how much is paid in taxes:
Scenario:
Earned Income:
Deemed Disposition:
1. Income Property:
2. Stock Portfolio:
Deemed Withdrawal:
Total Taxable Income Calculation:
Tax Liability:
Estate’s Remaining Value:
So, after paying $120,500 in taxes, John’s estate would keep $629,500 to be distributed to the beneficiaries.
To manage the tax burden on your estate, several strategies can be considered:
Implementing these strategies effectively requires careful planning and consideration of your unique circumstances. Professional guidance can help tailor these strategies to your needs.
Understanding these rules helps in planning your estate effectively. For more personalized advice, feel free to contact us.
Springer Financial
Rosetta Springer
Financial Advisor
647-993-8236
info@rosettaspringer.com
707 St. Clair Avenue Suite 520
Toronto, Ontario
M6C 4A1
Clients are always surprised at the simplicity of my financial solutions. In my experience, the real challenge lies in seeing the big picture and analyzing all the working parts. By delivering an approachable plan, I help my clients clarify the path to their goals. I feel lucky to do this work; I get to help people from all walks of life that are doing well in the world.