Do Beneficiaries Pay Tax on Money Inherited in Ontario?

You have been told you are a beneficiary, and money, shares or a property may be coming your way. A common worry is whether you will owe tax on it, and whether you should set some of it aside.

The short answer is that Canada does not have an inheritance tax in the way many people imagine. But the estate itself can owe tax, and some income can pass through to you. This article explains who generally pays what in Ontario.

The inheritance itself is generally not taxed to you

The Canada Revenue Agency (CRA) lists most gifts and inheritances among the amounts that are not reported or taxed. In plain terms, receiving a sum of money or an item from an estate does not usually mean you add it to your income on your own tax return.

That does not mean no tax was ever paid. It usually means the tax was dealt with on the deceased person's side, or by the estate, before you received your share.

What the estate deals with first

For tax purposes, a deceased person is considered to have sold all their property just before death. Any capital gain or loss is reported on the deceased's final return, not by the beneficiary. So if the deceased owned shares or a cottage that had grown in value, the tax on that growth is generally an estate matter.

There is an exception for a surviving spouse or common-law partner. Property transferred to a spouse or common-law partner who is resident in Canada at the time of death can avoid a gain or loss on the final return, and it generally must vest in that person within 36 months of death.

The final return has its own deadline. For a death between January 1 and October 31, it is due April 30 of the following year. For a death between November 1 and December 31, it is due 6 months after the death. If the deceased, or their spouse or common-law partner, was carrying on a business, the return is due June 15 of the year after death for deaths from January 1 to December 15, although any balance owing is still due by the normal payment date.

Probate costs come out of the estate, not your share personally

If the estate needs a court certificate (probate), Ontario's Estate Administration Tax applies. For applications on or after January 1, 2020, no tax is payable on estates of $50,000 or less. Above that, the tax is $15 for every $1,000 (or part thereof) of the estate's value, and it is paid by the estate, not by the beneficiaries or the estate representative.

Some assets are left out of the estate value for this tax. Jointly owned assets that pass automatically to the surviving owner or owners are excluded, as are RPPs, RRSPs, RRIFs and TFSAs with a beneficiary designation. If no probate certificate is applied for and issued, no Estate Administration Tax is due.

Where a beneficiary can still have taxable income

An estate can earn income after death, such as interest or dividends, before everything is distributed. The estate reports income it allocates to beneficiaries on a T3 slip. In most cases the allocated amounts are included in the beneficiary's income and deducted from the trust's income. If the beneficiary is a non-resident, the income is reported on an NR4 slip instead.

What happens when you later sell inherited shares or property depends on your own situation, so it is worth asking an accountant before you sell.

What to do next

Before the estate trustee pays out everything, it helps to understand the tax steps still open. A legal representative who distributes assets before getting a CRA clearance certificate (Form TX19) is personally liable for unpaid amounts, up to the value of the assets distributed. That is why a careful estate trustee may hold some money back.

• Ask the estate trustee whether the final return has been filed and whether a clearance certificate has been requested.
• Ask whether the estate earned income that will be allocated to you, and keep any T3 slip you receive.
• Keep records of the date of death value of any property you receive.
• Speak with an accountant before selling inherited shares or property.
• Speak with a lawyer if you think the estate is not being handled properly.

If you are thinking about refusing an inheritance, be careful. For tax purposes, a valid disclaimer made in favour of no one means you are treated as never having acquired the interest, while directing the property to a particular person is treated as an assignment, not a disclaimer. Get advice before signing anything.

Frequently asked questions