You may think that getting an inheritance would mean that you have won a lottery, you may feel fortunate, but remember that it has come at the cost of you losing someone you really love. This money also comes with a void and a lot of emotions that you have to deal with. It can be a tough time for you and you may find it difficult to decide where you should spend your inheritance money. One thing you should definitely know is – Canada inheritance tax.
Let me clear your doubt that there is no inheritance tax in Canada. You have to pay income tax on the deceased person’s income along with probate fees.
It is advisable that you take time to think about what you want to do with this money. You can pay off your debt, you can save and invest it somewhere, you can decide on creating your own legacy as well. In short, the possibilities are numerous and thus you should think thoroughly and decide with a calm mind when you have your emotions in control.
Canada Inheritance Tax
As mentioned, in the majority of cases, if you are getting any inheritance you do not have to pay Canada inheritance tax and that is because it has already been reported and deducted before you get it.
There are three major things that you should consider if you are getting an inheritance as a spouse or common-law partner.
- When a person dies, the fair value of the asset before the death is counted as the final value and is given to the survivor of the deceased if he or she is a resident of Canada.
- The process of inheritance needs to be finished within 36 months of the death.
- As it is net of taxes you do not need to pay it, but instead, it is included in the net income filing of the deceased person.
What About the Estate Tax in Canada?
Estate tax means the tax that is applied to the value of an asset. Canada Revenue Agency (CRA) doesn’t apply any taxes on assets of an estate because the tax on that is also said to be paid prior to the death. So the government is typically charging tax on the income and not on the assets.
When the return of the deceased person is filed, the capital gain is included in the same. For example, if John dies in August 2021 and has filed his income tax return for the financial year 2020-21, he doesn’t have to pay taxes for that financial year. But during the period of June to August 2021, the return is supposed to be filed by April 2022. So the state or the executive of the estate has to file taxes for income on these 3 months before April the next year.
It is also advisable for the executor to get a clearance certificate from the CRA stating that there are no taxes pending and the asset distribution can be done to the beneficiaries. Remember that the assets owned by the deceased are sold before the death at fair market value. It includes various types of assets such as businesses, real estate, any type of investment, lands, and RRSPs.
Capital Gain Tax on Assets
You should know that all the types of asset is taxed in different manners and do not attract the same tax method. Capital gains are taxed at 50 percent. They are added to the overall income of the deceased person at the time of filing the final returns.
So for example, if John owns a house for investment purposes with he bought at the value of $200,000 and at the time of his death, the fair value of the house is increased to $600,000. So, the capital gain would be charged on ($600,000 – $200,000 = $400,000). The 50 percent capital gain tax would come at $200,000.
Let us understand it with more examples.
Suppose that John has savings in RRSPs, on which the fair value has come around $120,300 before his death. This will add up in his final tax filing as a source of income.
Another example is that suppose John has got his grandparents’ house in inheritance. But it has been continuously given to the preceding generation so the house was passed on to him by his parents. The house has been in his family for the past 25 years. When John got the house the price of the house was $900,000. And when he died, the fair value came at $10,00,000. When John got the house, his parents would have already paid the capital gain on $900,000. So, the tax that he would have to pay for capital gain at 50 percent will come at $50,000. The calculation is $10,00,000 – $900,000 = $100,000.
Now let’s talk about non-registered investment. In this example, John was working for a company for the past 25 years and has got stock worth $300,000. This investment too would be sold at fair value at the time of his demise. The Adjusted Cost Base (ACB) for this stock has been calculated to be $70,000. So the difference between this amount would be taxable as a capital gain tax at a 50 percent rate. In addition to this, if John receives any dividend, it should also be included in the final income statement.
Assets at the Time of Death and Probate Fees
What we have covered till now is about the receipt of income at the time of death. Let us talk about what happens to the assets. Are there any taxes applied to that? Well, the answer is no! There are no taxes on assets, but yes there has to be the disposition of assets for the purpose of tax. Apart from the income tax, other charges like probate fees are applied by province.
Based on the asset, the probate fees vary. In property calculation, assets that have beneficiary names included like RRSPs, TFSA, or insurance are excluded. In addition to that, joint assets are also not included in the calculation of probate fees. The reason is that the beneficiary or the survivor is now the new owner of that asset. Though if the asset is designated to an estate, in that case, probate charges are applied.
You can check probate fees for different provinces on different values of assets from here.
Where Can You Invest Your Inheritance?
While you have to pay taxes on the capital gain and income, along with probate fees, you will still receive an inheritance. There are various uses for this money. It would not only help you but also your family members in a hard time.
For example, you are receiving $500,000 net in inheritance. If you put this money to invest in equity, mutual funds, SIPs, and other fixed assets such as bonds, you can have a considerable return generation for you in a few years. You can also apply this money for your personal goals, like paying off an education loan, or buying a house! So, plan your necessities and take steps slowly but steadily!