What taxes are due on death?
As the saying goes, death and taxes are the only sure things. And when someone dies, taxes and other fees will most likely need to be paid. That said, there is no separate “death tax” in Canada. Taxes on death may include income tax payable with the deceased’s final tax return, capital gains tax and probate fees.
The Canada Revenue Agency treats estates as if the deceased had liquidated all their assets at fair market value immediately before dying. If there is no spouse, the market value of RRSPs, RIFs, LRSPs and/or LIFs is included in income on death and taxed as regular income. All other assets are deemed to have been sold at fair market value on the date of death, resulting in capital gains or losses, which are included in income at 50% of value.
If there is a spouse, the deceased’s registered plans can be rolled into the spouse’s registered plans with no taxes owing. Non-registered assets can be transferred to the spouse tax-free, keeping the adjusted cost base.
In Canada, there is no inheritance tax, so those inheriting from you will not be taxed on the value of the assets when they inherit. They may, of course, later be taxed as a result of owning those assets (for example, income tax on investment earnings or capital gains tax when selling assets).
The final tax return
Your executor or estate administrator will be required to file a tax return for your final year of life. The final (or “terminal”) return must declare all income for the year of death, as well as all capital gains (or losses). Note that if the deceased person normally paid income tax by installments, no installments need to be paid between the date of death and the date the final tax return is filed (unless any installment payments are already overdue at the time of death).
Capital gains tax
Capital gains tax may be calculated on assets such as real estate (other than your primary residence) or securities. Capital gains tax is 50% of the increase in value of capital assets from the time they were purchased to the time of death.
Probate is a provincial matter, so legislation and fees (properly called estate administration tax) vary among provinces. Fees are most often based on the overall value of the estate. For example, Ontario’s probate fees (2019) are 0.5% of the first $50,000 of the estate’s value and 1.5% of value in excess of $50,000. So if an estate is worth $2 million, the fee will be $29,500. Estate value is calculated based on the list of assets that your executor must submit to the province along with a copy of your will.
How to reduce probate taxes on death
A key way to ensure your estate pays as little probate tax as possible is to designate beneficiaries on every account and asset where that is possible, including RRSPs, RRIFs and life insurance. RRSPs and RRIFs can be transferred tax-free to a spouse or to minor (or infirm adult) children or grandchildren. Ensure property such as your home and vacation property is jointly owned with right of survivorship. Hold bank accounts jointly with your spouse. If you do not designate beneficiaries or co-own, all these assets will become part of your estate and will be taxed accordingly.
You can also use trusts to delay taxes and reduce probate fees by having assets flow to a family or spousal trust. With this strategy, a trust that you create in your will takes ownership of assets, valued at your original cost. Taxes will come due on the death of your spouse in the case of a spousal trust.
Leaving securities to registered charities when you die will eliminate the capital gains tax on those assets (publicly listed shares or mutual funds) and will provide a charitable tax deduction on your terminal return.
The clearance certificate
Once your executor or estate administrator has settled your estate, the CRA will issue a “clearance certificate” that confirms all outstanding income taxes have been paid. Your executor should not distribute all the property from the estate until they have this certificate, because the final amount left to be passed to beneficiaries cannot be known until all taxes are paid.
As part of your overall financial and estate plan, discuss with your accountant or other estate planning advisor what taxes will likely be due on your death, and work through strategies to reduce them as much as possible to ensure that your heirs benefit from your estate to the fullest extent possible. If you don’t, your family could end up facing a tax bill they cannot cover with the assets you’ve left. And of course, ensure you have a detailed, up-to-date legal will.