What is an estate and how is it taxed?
An estate is the total monetary value of all the deceased’s investments, assets and interests. It includes a person’s belongings, physical and intangible assets, land and real estate, investments, collectibles, and furnishings.
In the simplest terms, 3 things happen when someone passes away:
- Their legal representative files their final tax return.
- When someone dies, the CRA treats any property or items owned at the time of death as though it was sold on the day before the person died, and deducts taxes from that estate. (Unless the estate is inherited by the surviving spouse or common-law partner, where certain exceptions are possible).
- The rest of the estate gets distributed to beneficiaries.
How do Canadian inheritance tax laws work?
How are the assets of a deceased person taxed?
Different assets are taxed in different ways.
Cottage, stocks, mutual funds and rental properties are considered capital property. As mentioned above, the CRA considers them as sold for fair market value at time of death and defines ‘capital gain’ as the difference between the adjusted cost base when the items were purchased and the fair market value when they were sold.
Any capital gains are 50% taxable and added to the deceased person’s income. When their final tax return is prepared, the estate will be taxed according to the deceased’s personal income tax rate.
If the estate is inherited by a surviving spouse or common-law partner
If you are the spouse or common law partner inheriting the ‘estate’ – which may include real estate (i.e. home, vacation and investment properties), registered investments (i.e. RRSPs, RRIFs) and other investments – you’ll likely pay less taxes.
As long as you are a Canadian resident and the inheritance is completed within 36 months of your loved one’s death, these assets will be transferred to you at the value they held at time of death.
There are a few other cases where income taxes may also be deferred. For example, if the beneficiary is a ‘qualified survivor’: a financially dependent child or grandchild under 18 or a financially dependent, mentally or physically infirm child or grandchild of any age.
If the estate is NOT inherited by a surviving spouse or common-law partner
In the eyes of the CRA, the deceased is considered to have sold all their capital property (including personal belongings, cars investments and business assets) at Fair Market Value immediately prior to death.
If any of these assets have gone up in value since they were first acquired, the estate will owe taxes on ‘capital gains’: whatever the assets were worth in the year of death. Capital gain is the difference between the adjusted cost base of the item when purchased and the fair market value of the same item at the date of death.
Unless these registered assets are inherited by a ‘qualified survivor’ (i.e. a spouse or financially dependent child), they are added to the estate and included in the income of the deceased person’s tax return. The required taxes are paid by the estate.
Are there any inheritance tax exemptions?
When the estate makes a profit from selling a small business, a farm property or a fishing property, The Lifetime Capital Gains Exemption could spare it from paying taxes on part – or all – of the profit it has earned.
It is also possible for the surviving spouse or common-law partner to receive The Principal Residence Exemption on the dwelling the couple shared. It doesn’t matter whether this property is a house, apartment, trailer, or boat, as long as the couple lived there most or all of the time.
What happens tax-wise if your inheritance increases in value after you receive it?
If you invest your inheritance money and earn income (such as interest or dividends) on that investment, you will be taxed on the income earned. The same rules apply if you sell a capital asset and it increases in value from the time you inherited it. Both these points are worth keeping in mind when getting ready to complete your tax return.
Are cash gifts taxable in Canada?
Money received from an inheritance, like most gifts and life insurance benefits, is not considered taxable income by the CRA, so you don’t have to pay taxes on that money.
What is the deadline to file a final return to the CRA?
The due date of the final return depends on the date the person died.
If the death occurred between | Due date for the final return |
January 1 and October 31 | April 30 of the following year |
November 1 and December 31 | 6 months after the date of death |
When a loved one passes, tax issues will come into play whether you are the legal representative in charge of settling the estate or the beneficiary figuring out how to declare any money you’ve earned (or lost) by investing your inheritance.
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