Is There an Inheritance Tax in Ontario? What Beneficiaries Owe

Many people expect to pay tax when they receive an inheritance. In general, the beneficiary does not, but the estate itself may owe taxes and fees before anything is paid out.

This article separates the taxes beneficiaries usually do not pay from the ones the estate pays, so you know what to expect and what to ask the estate trustee.

Do beneficiaries pay tax on an inheritance?

The CRA lists most gifts and inheritances among amounts that are not reported or taxed. So the money or property you receive is generally not added to your income.

Income that the estate earns after death and then allocates to you is different. An estate uses the T3 slip to report income it allocates to beneficiaries, and in most cases those amounts are included in the beneficiary's income. Estate income paid to non-resident beneficiaries is reported on an NR4 slip instead.

The deceased's final return

A deceased person is considered to have sold all their property just before death, and any capital gain or loss is reported on the deceased's final return, not by the beneficiary. Property transferred to a surviving spouse or common-law partner resident in Canada can avoid a gain or loss on the final return, and it generally must vest in that person within 36 months of death.

If the deceased, or their spouse or common-law partner, was carrying on a business, the final return is due June 15 of the year after death for deaths January 1 to December 15, but any balance owing is still due by the normal payment date.

Estate Administration Tax

For applications on or after January 1, 2020, no tax is payable on estates of $50,000 or less, and above that the tax is $15 for every $1,000 (or part thereof) of the estate's value. The tax is paid by the estate, not by the beneficiaries or the estate representative.

• Jointly owned assets that pass automatically to the surviving owner(s) are excluded from the estate value.
• RPPs, RRSPs, RRIFs and TFSAs with a beneficiary designation are also excluded.
• If no probate certificate is applied for and issued, no Estate Administration Tax is due.
• An Estate Information Return must be filed within 180 calendar days after the estate certificate is issued, even if the estate value is $0.

Why the estate may hold back money

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. For this reason, trustees often keep part of the estate back until taxes are settled, which can delay your payment.

An estate that qualifies as a graduated rate estate can be treated as such for up to 36 months after the death. A T3 return is due 90 days after the trust's tax year-end, but if the trust ceases to exist, the 90 days run from the date of the final distribution of its assets.

Estates are still presumed to be wrapped up within one year of death, often called the executor's year. When an estate is not simple, the court accepts that expecting administration to finish within that year may be unreasonable.

Other ways an inheritance can matter

Not owing tax is not the same as having no other consequences. If you receive ODSP, you must report any inheritance you receive or expect to receive to your caseworker. Inherited money is generally treated as income in the month it is received, and any amount still held the following month is treated as an asset.

You and each family member can receive up to $10,000 in total in a 12-month period from gifts, inheritances, trust and life insurance payments and lottery winnings without affecting income support. Amounts above $10,000 count as income in the month received, unless they are used for an approved disability-related item or service. Failing to report creates an overpayment that must be repaid. These ODSP amounts change from time to time, so confirm the current figures.

• Inherited property or possessions are treated as ODSP assets, not income, and some are exempt, such as a home the recipient lives in or a car used as the primary vehicle.
• On a separation, property a married spouse received by inheritance after the date of marriage is excluded from net family property, but an inherited family home is not excluded, so its value is shared.
• The Family Law Act property-division rules do not apply to common-law couples.
• Estate trustees carry out the wishes in the will, wind up the deceased's affairs, pay taxes, bills and other debts, and then distribute the estate according to the will.

What to do next

• Ask the estate trustee whether a final return and any T3 return have been filed.
• Ask whether a clearance certificate has been requested before distribution.
• Keep any T3 or NR4 slip you receive for your own return.
• If you receive ODSP, tell your caseworker about the inheritance you receive or expect.
• Confirm with an accountant how estate income affects you.
• Speak with a lawyer if you think the estate is being delayed or handled poorly.

Frequently asked questions