Wednesday, 30 April 2008

Inheritances and Inheritance Tax for Canadians

Question from a Reader:
"My wife has landed immigrant status in Canada, and has lived here for over 20 years. Her father has recently past and has left her aprox $30,000 Cdn. What are the laws in Canada towards this Money. Is it declared as income? Is there an inheritance tax that she will have to pay once she receives the money? Everything I read says Canada does not have an inheritance tax but I'm sure our Government will take a chunk some how."

A Canadian taxpayer receiving an inheritance from inside or outside the country does NOT include that money in their income. It is tax-free. Our tax collector the CRA says so here.

There is no inheritance tax in Canada, thankfully. The closest thing is the rule that a deceased person is deemed to have sold everything on the day before their death, which can trigger capital gains to pay, or a very large income all at once, for instance when RRSPs are considered to have been terminated and all of the proceeds are taken into income. The person who pays such taxes is the dead person, or more accurately, the estate of the deceased. By the time the cheque arrives to the inheritor, all those taxes must have been paid out of the estate, otherwise the executor is liable (not the recipient). Executors make sure they are not exposed by getting a written clearance certificate from the CRA stating that all taxes have been paid.

The only taxes your wife would pay is on any gains or income from investing that money afterwards.

Inheritances that a Canadian receives from abroad are also not taxed as income by the recipient. The foreign country with an estate or inheritance tax, like the USA or the UK, will have levied its taxes before the money can be distributed.

In general, even in countries which have an inheritance tax, by the time the money is delivered to the recipient, any inheritance owing should/will have been paid. It's the estate that pays.

My condolences on her losing her father.


thebigjc said...

Your link to the CRA seems a little odd. Could you correct it? I'd be interested in reading your source.

CanadianInvestor said...

The link is now fixed. Thanks for bringing it up.

CanadianInvestor said...

Right now, the link is verrryyyy slowwwww to load. As you likely have noted elsewhere, CRA has extended the NetFile deadline to May 6th due to problems with its website.

Jim Somerville said...

There's no inheritance taxes but there are fees to probate estates in Canada. Alberta has the lowest, so one should consider moving there to die! ;) Ontario is the worst. But seriously, there are ways to deal with the estates of dying parents before they depart so that probate can mostly be avoided.

CanadianInvestor said...

Jim, you are right that probate fees are more or less a tax on wealth. The various ways of keeping assets out of the estate to escape probate are worth a few blog posts, especially since there are some potential downsides. Since you are now a blogger too I notice - and welcome to you - will you wade in?

Jim Somerville said...

Thanks for the welcome! I'll put it on the list of potential topics.

xislander said...

Consider the following: The estate consists of a home valued at $1 million but, for the sake of argument, has zero monatary assets.
Would the home be forced into sale because the estate does not have the assets to pay the taxes on the deemed sale value?

CanadianInvestor said...

The executor would have to pay the taxes somehow and if sale of the home were the only possibility, I believe that would have to happen unfortunately.

Anonymous said...

Is this true if the inheritance is in an IRA also? Still no tax on the funds inherited whether taken as a lump sum or annuity?

CanadianInvestor said...

Anonymous, I suspect there would be US taxes to pay to the IRS by the estate. Since Roth's are tax-protected/deferred accounts I'd guess (and here I am venturing a guess as I don't really know how things work in the USA) that if the owner dies, the IRA dissolves and the funds go into the estate and get taxed there. I'd be surprised if you as the inheritant were able to take over the money and keep the IRA structure intact. If I'm right you would only get a big lump sum after all US taxes were paid. Maybe you could ask this blogger who seems to be more familiar with IRAs -

Anonymous said...

If a canadian lives and resides outside canada for more than two years and receives an inheritance from outside Canada. Can that person bring it back to Canada tax free????? Or will he or she have problems with tax man in Canada????

CanadianInvestor said...

Anon, the initial receipt of the inheritance is not considered income and isn't taxed. After that, the income that the inheritance generates may or may not be subject to tax, even if it held outside the country, depending on whether the person is considered resident for tax purposes by the CRA. Residency isn't based on time out of the country or days per year in Canada, it's based on ties to Canada, like having a spouse in Canada, a house, credit cards, dependent children, cottage, club memberships etc. "Have you really moved home permanently?" is the question.

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