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. Under Canadian tax law, a deceased taxpayer is deemed to have disposed of all of their property immediately before death, subject to certain exceptions discussed below. An individual, who owns assets that have appreciated in value may be subject to a significant tax liability and should consider how such a tax liability will be funded. Similar rules also apply to cause the fair market value of registered assets such as RRSPs and RRIFs to be included in income on death.
The deemed disposition on death can cause particular issues for private company owners who have built businesses with significant 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 necessarily 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 the deemed disposition rules is where an individual leaves assets (including registered funds) to a spouse, or capital property to a qualifying spousal trust. The use of this planning strategy will defer the capital gains tax on such property until such time as the property is sold or the spouse dies.
The executor of the deceased must submit an income tax return in the year of death (known as the terminal return). Included in this return is the taxable income earned by the individual in the calendar year leading to their death, including gains arising from the deemed disposition rules on death. It may be possible to file separate returns for certain types of property (a “rights or things” return) which will benefit from marginal rate taxation. Annual tax returns also need to be filed for the estate, with special tax rules applicable to “graduated rate estates”.
Estate Taxes in the United States
Unlike Canada, there are estate taxes in the United States, which is relevant for any US citizen (including those resident in Canada) or Canadians owning property in the the US.
For Canadian residents/U.S. citizen, the United States imposes an estate tax on the fair market value of taxable estates (not just gains) in excess of USD $11.2 million in 2018 (indexed annually) for an individual and USD $22.4 million in 2018 for a married couple (indexed annually). The rate of estate tax is 40% on taxable estates in excess of USD $1 million.
It is important to note that the U.S estate tax exemption will return to pre-2018 levels (USD $5.6 million in 2018, subject to indexing) in January 2026 assuming there are no legislative changes in the future. For wealthier individuals, this can create significant uncertainty in terms of planning for estate taxes. Affected individuals may want to review current insurance, will and trust arrangements in light of the increased exemptions and the sunset provisions in 2026.
Canadian residents/citizens who own “U.S. situs assets” (for example, a condo in Arizona, shares of U.S. corporations or personal property located in the U.S. such as home furnishings) may also be subject to U.S. estate taxes upon death. Estate tax is levied on the full value of the U.S. assets as at the date of death. Canadians are entitled to a “unified credit” equal to the greater of USD $13,000 (the equivalent to USD $60,000 in U.S. situs assets) and the amount determined by the following formula: USD $4,425,800 (which is the exemption available on USD $11.2 million) x the value of the deceased’s U.S. assets/the value of the deceased’s worldwide assets (all determined as of the date of death). This formula will effectively exempt Canadians with an estate valued at less than USD $11.2 million (in 2018) from the application of U.S. estate taxes.