An often misunderstood issue people face is wondering what tax is required to be paid, and by whom, when someone passes away. The issue itself is big enough to consist of multiple articles, but in this one, we can clear up a few misconceptions on the subject.
A common question we receive as financial advisors is what tax do beneficiaries pay? The simple answer to that question is none. There isn’t any inheritance tax in Canada, unlike in some other countries. Any money you receive as a beneficiary of an estate in Canada is considered after-tax money and it doesn’t need to be included as a part of your income. This isn’t the case in the United States, as there are some states that do have an inheritance tax, such as New Jersey. The amount of inheritance tax largely depends on the relationship of the beneficiary in regards to the deceased, as well as the property value. The fact that some states have inheritance tax is a common source of misconception. However, in Canada, the estate pays the tax rather than the beneficiary. Any inheritance a beneficiary receives would have already been paid. Another common misconception relates to the estate tax. The question often arises regarding whether the estate has to pay a tax based on its assets. Having said that, the technical answer to the question is no. There isn’t estate tax in Canada, but there is estate tax in the United States. In Canada, the Canada Revenue Agency (CRA) doesn’t tax the assets of an estate, rather, they tax the income. The CRA requires that tax owed on income, up to the date of death, must be paid. After you pass, a final tax return must be filed, including any income received up to the date of the passing, including income from any pensions, investments, and employment. When you pass away, you are deemed to have disposed of all your assets. That disposition can create additional income that has to be included in the final tax return. A good example of how the deemed disposition can create income includes an item such as rental property. If you own rental property and you pass away, you are deemed to dispose of the property upon death. Consider it the same as selling property, with any capital gains included on the final tax return. Another good example of this would include an RRSP. If you have any income left in your RRSP, upon passing away, unless the beneficiary is your spouse, you are deemed to dispose of that RRSP upon death. It would be comparable to you withdrawing all the money from your RRSP when you die - that would be considered income and is taxed upon your final return. As mentioned, there is no estate tax in Canada; as explained in the article, the CRA doesn’t tax the assets of an estate. However, having said that, it’s important to note that provinces do impose probate fees. Probate fees are completely separate from income tax. Probate fees, by their nature, vary by province and typically go up based on the value of the estate. Estate and tax planning is a complicated process, which is why it’s worthwhile to seek out professional help from a financial planner, accountant, or lawyer to make sure your estate is correctly planned and set up. CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability. Tax & Estate advice offered through Canaccord Genuity Wealth & Estate Planning |
AuthorClinton Orr is a Senior Wealth Advisor and Senior Portfolio Manager with Canaccord Genuity Corp. Archives
July 2023
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