Do Beneficiaries Pay Tax on an Inheritance in Ontario?
In most cases, no. The CRA lists most gifts and inheritances, and most life insurance payouts after someone's death, among the amounts you do not report as income.
Tax can still arise elsewhere. At death, the deceased is treated as having sold all their capital property just before death at fair market value, and any gain or loss is reported on their final return. Property passed to a surviving spouse or common-law partner who lived in Canada at the time of death may not produce a capital gain or loss, and all or part of the gain on a principal residence may be exempt. If you later sell what you inherited, you report the sale on your own T1 return, with the gain measured from the fair market value reported on the final return.
Before paying you, an estate trustee may ask you to wait for a clearance certificate (Form TX19), because without one they are personally liable for the deceased's unpaid tax, up to the value of the property distributed. Estate administration tax is charged on the value of the estate when probate is issued.
Key takeaways
- Designated life insurance and plan proceeds generally go straight to the named person and, for insurance, are not part of the estate.
- If you live outside Canada, estate or trust income paid or credited to you is subject to Part XIII tax at 25%, which a tax treaty can reduce.
- If you live in Ontario and inherit foreign property costing more than $100,000, you may have to file Form T1135.
- If you receive ODSP, you must report any inheritance you receive or expect to receive, and placing it in a trust may change how it is treated.