Estate Related Taxes in Canada
is done to ensure a proper transfer of one's assets at time of death, however it is also done to help minimize taxes that arise on death. Below is a brief overview of estate-related taxes and how those taxes can be minimized through an effective estate plan:
Estate taxes in Canada
Canada does not have an estate tax, unlike that in the United States (US estate taxes). There are however taxes that will arise at time of death:
- Probate fees (1.5% in Ontario on the value of the estate) which can be in most cases planned around and minimized.
- Capital gains tax resulting from what is known as the “ ” of one’s capital property (for example shares) at the time of death.
- Inclusion into income of the full value of the deceased’s RRSP, RRIF and DC Plan.
The Income Tax Act provides for a deemed disposition of a deceased’s assets immediately before death. Deemed disposition means that these assets are treated, for tax purposes, as if they were disposed of or sold at the time of death for fair market value, subject to possible tax-free rollover to a spouse or spousal trust.
Probate fees (known as estate administration tax in Ontario) are levied by nearly all provinces, and are the fees associated with verifying your will. At the time of death, there are some legal formalities that are associated with your will. Namely, your will must be legally approved by the courts in your province before certain assets (such as bank accounts and real estate) can be transferred. This process verifies that your will is legitimate and that the named beneficiaries are entitled to your assets. It also confirms the appointment of your executor and fulfills the required documentation. This process comes with fees (essentially a tax) based on a percentage of the assets in your estate. The probate fee (estate administration tax) in Ontario is 1.5%. There are a variety of planning techniques that are best implemented by your lawyerin order to minimize or plan around this fee. Some typical techniques include using a primary Will and Secondary Will, naming a of your RRSP, RRIF, and insurance policies, and transferring assets into joint ownership with right of survival. The income tax considerations of these techniques should be reviewed in more detail.
Capital Gains Tax
The Income Tax Act deems that on death you have sold all your capital property (such as shares of a private company), regardless of the fact that you may be retaining the property in your estate or bequeathing it to your children or other named beneficiaries, other than your spouse who can receive the property tax-free either directly or through a trust.
If the value of the capital property deemed to have been disposed of at time of death is greater than its original cost (known as its "adjusted cost base") then a capital gain will be realized, and 50% of that gain is subject to tax and must be included in the last tax return of the deceased person, known as their terminal tax return. There is no capital gains tax applicable to any gain on the value of the deceased person's home (their principal residence) or property that is transferred to a spouse or a spousal trust. For more information, see Capitals Gains.
Therefore, if a person has shares in a private (or public) company and at time of death they have a value of $10mm and their adjusted cost base (meaning what they paid for them) was $1mm, then the Income Tax Act deems that these shares have been disposed, meaning sold, and a $9mm capital gain will be deemed to have occurred, 50% of which, $4.5mm will be included in their terminal tax return and based on the top marginal tax rate of 50% there will be a tax liability of $2.25mm. As part of the estate planning process, consideration as to how this tax will be funded (such as through insurance or liquidation of other assets) should be addressed.
Registered Retirement and pension plan income inclusion:
While funds are invested in a person's Registered Retirement Savings Plan ("RRSP") or Registered Retirement Income Fund ("RRIF"), they will accumulate income tax free. The same is true for someone who is a member of a Defined Contribution Pension Plan ("DC Plan"). If funds are withdrawn from either their RRSP, RRIF or DC Plan, those funds are included in their income.
At time of death, all the remaining funds in these plans are included in the person's terminal tax return. It is possible to defer this inclusion into income if the deceased person has named their spouse as the beneficiary of their RRSP, RRIF or DC Plan, in which case the income inclusion will occur on the death of the surviving spouse.