Does Canada Have an Inheritance Tax or Estate Tax? How It Works

If someone has left you money, a house or shares, you may wonder whether Canada will tax what you receive. If you are planning your own estate, you may be asking the same question about your family.

The short answer is that the tax system works differently from an inheritance tax. The tax is generally dealt with on the final tax return of the person who died, and the executor is usually the one who files it.

This article covers Canadian federal tax law, which applies in every province.

Inheritance tax versus tax on the final return

An inheritance tax is a tax charged to the person who receives a gift from an estate. Canada's federal system does not work that way. Instead, the tax that arises at death is carried by the final return of the person who died, not by an inheritance tax.

In practice, this means the estate may owe tax before heirs receive anything. The heirs generally receive what is left after the estate pays the deceased's taxes and other debts.

How the deemed disposition works

On death, a taxpayer is deemed to have disposed of each capital property immediately before death for proceeds equal to its fair market value. The CRA describes this as treating the deceased as having sold all property just before death, which can create a gain or loss.

The gain or loss is the fair market value on the date of death minus the adjusted cost base. It is reported on Schedule 3 and line 12700 of the final return. The gain is reported by the deceased on the final return, not by the beneficiaries.

The person who acquires the property because of the death is deemed to acquire it at a cost equal to its fair market value immediately before death. That sets the heir's adjusted cost base.

Who reports what

Current expenses such as maintenance and repairs cannot be added to the adjusted cost base of inherited property.

Situations that change the result

The general rule has several exceptions. Which one applies depends on who receives the property and what the property is.

• Spouse or common-law partner: property passing to a spouse or common-law partner resident in Canada can roll over at the deceased's adjusted cost base instead of fair market value. A qualifying spouse trust created by the will can also qualify.
• Timing condition: the rollover applies only if the property vests indefeasibly in the spouse or trust within 36 months after death, or a longer period the Minister allows on written application.
• Non-resident spouse: a spouse who was not resident in Canada immediately before death does not qualify, and the ordinary rule applies.
• Opting out: the legal representative may elect that the rollover not apply, property by property, which can help use the deceased's losses or lower rates on the final return.
• Farm or fishing property passing to a child: the legal representative can choose a deemed amount within set limits.
• Family home: a gain on the deceased's home may be fully or partly exempt, but it must still be reported on Schedule 3 and designated.

Registered plans are handled separately. For an unmatured RRSP, the annuitant is treated as receiving the plan's full fair market value just before death, and that amount is included on the final return. A TFSA holder is treated as receiving the value of the TFSA property, but no TFSA income is reported on the final return.

Deadlines and the executor's responsibility

For a death from January 1 to October 31, the filing and balance owing are due April 30 of the following year. For a death from November 1 to December 31, the final return is due 6 months after the date of death. Different dates apply if a business was carried on.

Late filing with a balance owing carries a penalty of 5% of the balance plus 1% for each full month late, up to 12 months, and unpaid balances bear compound daily interest.

Before distributing property, a legal representative must obtain a clearance certificate from the Minister. Without it, the representative is personally liable for the amounts to the extent of the value of property distributed.

What to do next

• List every asset and its value on the date of death.
• Find the original cost of each asset, since the gain depends on it.
• Note who is receiving each asset, especially any spouse or common-law partner.
• Keep records of the fair market value of property on the date of death.
• Do not distribute the estate until the tax position is confirmed and a clearance certificate is addressed.

Because the result depends on the assets and the family, it is worth confirming your position with a lawyer or accountant before the final return is filed.

Frequently asked questions