How Much Does Inheritance Tax Insurance Cost?

The cost of a life insurance policy to cover taxes on inherited assets depends on the size and type of the policy. A policy should be large enough to cover the final income tax and the sales tax imposed on assets of the estate, as well as cover outstanding debt and any additional fees for the probate process.

Keep reading as we discuss how inheritance tax is handled in Canada and what fees are incurred when the estate enters probate. We also look at how life insurance policies are leveraged to cover these taxes.

 

Does Canada Have an Inheritance Tax?

Canada does not impose an inheritance tax on anything an individual receives from the estate of the deceased. Instead, taxes are handled before the estate is released from the probate process.

The Canada Revenue Agency treats the estate of the deceased like it is a sale. Instead of implementing a specific inheritance tax and putting the weight on multiple heirs, the value of the estate is established and then the tax on that value is calculated and paid before the probate process ends.

This sales tax can be avoided in a few instances, but understanding when it is likely to occur can help you avoid surprise taxes on the estate of the deceased. Even so, because taxes are taken out before assets are distributed, heirs do not need to worry about being held liable for those fees.

 

After-Death Fees in Canada

The fees relating to an estate or inheritance tax in Canada relate directly to:

  • The probate fee charged by the province
  • Income tax owed by the deceased for the past year
  • Sales tax on the value of the estate
  • Outstanding debts or liability that need to be settled

These items diminish the value of the estate before anyone can touch their inheritance. An executor needs to handle these situations before the probate process can end.

 

Probate

The probate fee is the amount taken from the estate to cover the costs of the probate process. Every province in Canada, except for Quebec and Alberta, charges a probate fee, but how it is calculated depends on your location.

A probate fee can be a flat fee, or it can be charged as a percentage of the estate. For example, in Ontario, the probate fee is $15 for every $1,000 in estate value over $50,000. Estates at $50,000 or below do not have an imposed probate fee.

 

Income Tax Owed

When an individual dies their legal representative is required to file a deceased tax return to the CRA. While the due date of the document depends on the date of their death, the form will key the CRA in on the death and trigger them to calculate any taxes owed from the return.

Any non-registered capital assets are treated like they were sold for fair market value immediately before death, and that amount triggers a capital gains tax.

Fifty percent of the amount is taxable, and it is added to the other income of the deceased on the final tax return along with the fair market value of RRSP or RRIF accounts (although there is no special treatment for capital gains there).

The amount owed from the final tax return is taken from the estate before it is dispersed.

The executor cannot settle the probate process until asking for and receiving a Clearance Certificate from the CRA that verifies all income taxes have been paid or security has been accepted.

 

Sales Tax

Sales tax is imposed on the assets of the deceased. Anything that is not inherited by a spouse or a common-law partner is assumed to have been sold for fair market value immediately before death, including non-registered assets such as:

  • Personal belongings
  • Cars
  • Investments
  • Business assets

If anything has gone up in value since it was acquired (such as real estate) then the estate owes taxes on the capital gain in the year of death. This is imposed on the difference between the fair market value when purchased and the fair market value at the date of death.

 

Outstanding Debts

The executor is also responsible for paying any outstanding debts a person has at the time of death. If there are not enough financial assets to cover these costs, then non-registered assets are sold off and the amount is used.

Common examples of outstanding debt include:

  • Mortgages
  • Lines of credit
  • Loans

If any outstanding debt is taken on alongside a cosigner, the responsibility goes to the cosigner and not the estate.

 

Using Life Insurance to Cover Inheritance Taxes and Fees

Life insurance is one of the most effective ways to cover taxes and fees imposed on an estate after death. This helps the original value of the estate remain intact for distribution to heirs, and you can even add extra value into the policy to increase what they receive.

It is important to make sure the life insurance policy is paid out directly to beneficiaries. Failing to name a valid beneficiary will cause the policy to default into the estate, leaving it susceptible to taxation and increasing the value of the estate.

As long as you keep the life insurance policy updated to pay out to beneficiaries, it can be leveraged to effectively cover inheritance taxes and fees.

 

Using Term Life Insurance for Debt

Term life insurance is a popular choice for covering debt, fees, or expenses that will fall off your obligations after a period. Examples include:

  • Mortgages
  • Debt on a schedule
  • Dependencies, such as a child

If you only need coverage for a certain length of time, then term policies can provide that peace of mind at a lower cost.

 

Using Permanent Life Insurance for Estate Taxes

A permanent life insurance policy is most effective for covering the inevitable taxes that will be taken from your estate. You can use the policy to offset:

  • The last income tax
  • Long-term debt
  • End of life expenses
  • Taxes on the value of the estate

These policies do not expire, and they are better suited for ensuring a tax-free lump sum is given to beneficiaries to balance out estate costs.

 

Calculating the Cost of Life Insurance to Cover Taxes

The cost of life insurance depends on too many factors, including your age, health, income, and the amount you need. Get in touch with Sim Gakhar today to set up a policy that works for your inheritance tax needs and discover an accurate estimated cost.

 

FAQs & Helpful Resources Regarding Life Insurance for Estate Planning