Is There an Inheritance Tax in Alberta? What Heirs Pay

If you expect to receive money, property or investments from someone who has died, it is natural to ask whether you will owe tax on what you receive. Many people assume an inheritance is taxed like income, and that worry can make a hard time harder.

In Alberta, the income tax questions after a death are mostly federal and are mostly handled by the person administering the estate. This article explains where the tax generally falls, when a beneficiary may still have something to report, and what to ask the executor.

This article covers the law of Alberta.

Where the tax generally falls: on the estate, not on you

The tax rules after a death focus on the person who died. When someone dies, they are considered to have sold all their property just before death, even though no sale takes place, and that can create a capital gain or loss. The tax on that gain is reported on the deceased's final return, so it is paid out of the estate and not by the heir.

The same idea applies to registered plans. The value of an RRSP is treated as income of the person who died in the year of death, and a named beneficiary does not pay tax again on an amount already included in that income. In practice, the estate's legal representative deals with this tax before the estate is distributed.

When a beneficiary may still have something to report

Beneficiaries are generally taxed only on amounts paid to them that the estate deducts. For example, an employer death benefit that the estate deducts is reported by the beneficiary on a T3 slip, and up to $10,000 of employer death benefits is exempt, with any excess taxable.

Income earned after death can also matter. Income an RRSP earns after the death is taxed to the designated beneficiaries or the estate when it is received.

If you later sell something you inherited, you report that sale on your own T1 return, using the fair market value shown on the final return as your starting cost. If the estate itself sells property after the death, the estate reports that sale on a T3 return.

Common situations at a glance

Exceptions when a spouse or common-law partner is involved

Property passing to a spouse, common-law partner or qualifying spousal trust can be treated as sold at its adjusted cost base instead of fair market value, and the recipient takes over that cost. This requires the spouse or partner to be a resident of Canada at death and the property to be locked in for them no later than 36 months after the date of death.

The legal representative can also elect, property by property, not to use that rollover. For an RRSP, the value is not treated as received if the spouse is the sole designated beneficiary and all of the property is transferred to a qualifying plan of the spouse by December 31 of the year after death. Whether any of this applies to you depends on the facts, so confirm it before assuming a result.

What to do next

You do not usually file the deceased's tax returns yourself unless you are the legal representative. Your practical job is to ask good questions and keep good records.

• Ask the executor or administrator whether the final return has been filed and whether any tax is owing.
• Ask whether the estate will deduct any payment made to you, since that can affect whether you receive a T3 slip.
• Ask when you can expect your share. A legal representative must obtain a clearance certificate before distributing property, or may be personally liable for amounts owing up to the value distributed.
• Keep records of what you receive and the values reported, in case you sell later.
• Speak with a lawyer or accountant if a spouse, an RRSP, a business or farm property is involved.

Frequently asked questions