Estate-Related Taxes

In Canada, there are no "estate taxes" per se, other than the provincially imposed probate taxes (known in Ontario as estate administration tax). There are, however, taxes that will arise at time of death in relation to the deemed disposition of an individual’s assets, as under Canadian tax law, a deceased taxpayer is deemed to have sold  all of their property immediately before death, subject to certain exceptions discussed below. An individual, who owns assets that have appreciated in value over their adjusted cost base, may be subject to a significant tax liability and should consider how such a tax liability will be funded.

The deemed disposition on death can cause particular issues for private company owners who have built businesses with significant goodwill value.  The deemed disposition of the private company shares results in potential capital gains tax that must be paid. The issue facing these owners is that while a tax is due, no actual sale of shares took place. As such, there is not necessrily sufficient cash (or other liquid assets) available to pay the tax.

Therefore, it is important to properly plan for this tax on death. For strategies on dealing with these taxes, please see the estate planning section.

One exception to this deemed disposition rule is where an individual leaves assets to a spouse or to a spousal trust. The use of this planning strategy will defer the capital gains tax until such time that the property is sold or the spouse dies.

Finally, the deceased must also submit an income tax return in the year of their death. Included in this return is all of the taxable income earned in the year leading to their death, including the deemed disposition on death.  A separate tax return can be filed for income that was earned (but not yet paid) during the year of death and a separate tax return is also filed for the resulting estate of the individual.

 

Estate Taxes in the United States

Unlike Canada, there are estate taxes in the United States, which is relevant for any US citizen resident in Canada or anyone contemplating moving to the US. A very general synopsis of Unites States estate tax is described as follows: For 2014, the United States imposes an estate tax on estates in excess of $5,340,000. The estate tax is applied regardless of the asset mix of the individual. If an individual has an estate in excess of the aforementioned threshold, they will likely have a US estate tax obligation on their death. The US estate tax system is a true example of an estate tax, as it taxes the estate based on its overall value.

In very simplistic terms, a US citizen or someone subject to US estate taxes, that owns $10,000,000 of cash at the time of death they will have a US estate tax liability. The same person in Canada (assuming they are not a US citizen) would not have a tax liability in this situation (other than potential probate fees). If on the other hand the person in Canada has $10,000,000 worth of shares that had a cost base of $1,000,000 then on death there is a deemed disposition of those shares which will give rise to a capital gains tax and as such this tax liability is a form of  an estate tax liability.