Canada has no inheritance tax, which means the benefactor is not required to pay taxes on a gift within an estate. But that doesn’t mean death is tax-free. Death can trigger some unforeseen taxes that can impact the value of your estate.
Before an estate is divided and inheritances have been distributed, the Canada Revenue Agency (CRA) takes its share.
Disposal of capital property
When an individual dies owning capital property, that property is considered to be disposed of at fair market value. While the property is still held by the estate, the government considers it sold and valued at the market price at the time of death. Capital property is defined as non-registered assets like belongings, vehicles or investments (mutual funds, stocks, bonds or real estate). A principal residence is exempt from capital gains but additional real estate, like a cottage, is not.
Capital gains on property
If the value of capital property has increased since the time of purchase, the estate will pay taxes based on the capital gains. Capital gains equal the difference between the fair market value of the property when it was purchased and the fair market value when the owner dies.
Example: An individual purchased shares with Company XYZ at $12 many years ago. When that person died, the shares were selling at $42. The capital gain will be $30, even though the shares were never sold.
Asset disposal can result in a heavy tax liability on the estate and consequently reduce its value. Again, the beneficiaries do not pay the tax; it is collected from the estate, which can mean a lesser gift. Assets and capital property must be reported in the Final Return.
Once the Final Return is filed with the CRA, the estate must pay the taxes owing.
The Clearance Certificate
Once the taxes have been paid, your executor or a legal representative must get a Clearance Certificate from the CRA. This certificate confirms that all taxes owing have been paid through the estate. It is crucial to get this certificate — without it, beneficiaries could be responsible for taxes owing by the deceased.
Rolling over property
If you’re looking to avoid these taxes, you might consider transferring non-registered capital gains to your spouse or common-law partner. This means that funds can be transferred to a spouse or common-law partner with little tax hassle. The CRA calls this a refund of premiums.
If your estate does not have enough investments or insurance to cover the taxes, you might leave your loved ones with the burden of an unnecessary financial liability. Proper planning ensures that your heirs will avoid unexpected expenses.