Death and taxes may still be among the only certainties in life, but in Canada, it’s not as simple.
The country has no inheritance taxes, so the beneficiaries of an estate following someone’s death do not have to pay any money on an estate they inherit.
But Canada does have other guidelines regarding the taxes that must be paid following a death. Here’s our guide to navigating inheritance taxes in Ontario and most of Canada.
While Canada’s estate taxes outlined above differ from those in other countries, most Canadians must acknowledge certain taxes on an estate at death that needs to be addressed before inheritors receive an estate.
There are several taxes that an estate in Ontario needs to pay on death. The key taxes include:
This tax, also known as a probate fee or probate tax) is about 1.5% of an estate’s value. This is considered Canada’s only type of what would be called estate taxes. There are many ways to prepare for this tax, including online calculators.
This includes the deceased’s personal income taxes due the year they die, including what’s deemed “unusual income” before death, as well as income taxes earned by the estate through any type of trusts. In Canada, this is called disposition taxes, a kind of final tax return that should be filed by the executor or liquidator of the estate.
Let’s take a closer look at these key forms of death taxes in Canada.
The Estate Administration Tax, or EAT, taxes the value of assets tied to an estate on the day of the death. Financial advisors can work with you to significantly reduce or even eliminate an EAT through careful tax planning prior to death.
Importantly, the EAT is reduced in Ontario by the value of all debts related to real estate in the province on a death date, including lines of credit and mortgages. This is required to be paid in full when the application for probate is filed. Credit card debts do not reduce EAT.
There is sometimes a way to defer full EAT payment if there is limited liquidity tied to the estate until assets can be sold. That deferral not only requires some sort of security issues for payment but also needs a formal court order to proceed.
The estate trustee plays a vital role in the EAT. The tax is not paid through their own money. In order for an estate trustee to complete a probate application with an EAT, financial institutions will usually issue a bank draft from the deceased’s assets that are directly payable to the Minister of Finance, but an estate trustee or lawyer must request that route.
What’s not part of an Estate Administration Tax? Assets that are not part of an estate upon death, for instance, property that’s owned jointly.
While Canadians do not have to pay taxes on cash in a bank account, or on an estate’s assets and capital value, estates do have to pay some income taxes. These blanket laws include income earned by an estate or the deceased directly in the year leading up to their death, as well as interest earned on savings.
Amounts earned through life insurance is not taxable, but both a Registered Retirement Income Fund (RRIF) or a Registered Retirement Savings Plan (RRSP) are incorporated into income that is taxable unless both are rolled over to a dependent child or surviving spouse.
Also labeled as disposition on death in Canada: capital gains taxes. These are payable on the value increase from the purchase time and value at death. If such an asset is not sold after death, the asset needs to be appraised to calculate a value.
Capital gains typically are tied to real estate, gold, cryptocurrency, and public company shares.
While there is a capital gain exemption of the deceased’s principal residence, there are no exemptions in Canada for rental properties or cottages, and those increased taxes must be managed by the trustee of the estate.
That’s why many of these types of properties are sold for market value following a death. Private company shares may also have capital gains exemptions, but they are usually limited.
If there are types of assets that are technically outside of the estate, those reduce an estate’s value that’s available to pay taxes, but it does not alter the income tax amount that must be paid by that estate.
Those types of assets include life insurance, a Tax-Free Savings Account, or a Retirement Savings Plan.
• Part of successfully completing the Estate Administration Tax is planning so it does not impact the beneficiaries negatively by depleting the estate’s value or forcing the executor to pay what is due in taxes.
• Because the trustee of the estate is technically liable for the estate’s taxes, he or she must not only determine and pay the full income tax amount but get a clearance certificate before awarding the estate to designated beneficiaries.
Getting all of the taxes in order after a death can be complicated in Canada, but you don’t have to do it on your own. Having a trusted financial and investments advisor on your side can make a world of difference.
Sim Gakhar has worked closely with those planning their estate and with estate trustees throughout Ontario and British Columbia. An advisor with Hub Financial, a top MGA in Canada, Gakhar’s mission is always to ensure financial security through comprehensive estate planning. To set up an initial consultation with Gakhar, either reach out directly over the phone at 647-889-7290 or via email at [email protected].
Successful estate planning does not need to stressful. When you work with Gakhar, you can rest assured knowing that you’re addressing all the required taxes needed to move the estate easily and quickly to any beneficiaries.
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