Navigating the World of Death and Taxes

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TaxesPassing wealth down to your heirs isn’t always as straightforward as one might assume. Inheritance issues are not uncommon and can spill over into larger problems for families and friends who are already grieving.

To make matters worse, you also have the government to worry about. In their eyes, a person leaves the Canadian tax system when they die. So what does that mean for beneficiaries? Are they subject to paying off any residual taxes left behind? What needs to be paid in order for them to receive their inheritance?

While the answer to those questions is somewhat simple on one level, there’s a little more to it than meets the eye. With that in mind, it’s important to have a good understanding of exactly what the Canadian government wants in terms of taxation when someone passes.

Does Canada Have an Inheritance Tax?

The short answer is no. In fact, Canada is the only G7 advanced economy that does not have an inheritance tax. This can be somewhat deceiving, however, as Canadians aren’t allowed to pass on their wealth completely tax-free.

When you die, your legal representative has to file a deceased tax return to the Canada Revenue Agency (CRA). It’s essentially the deceased person’s very last tax return ever. Any tax that is owed until the point of death must be paid. The money for this tax return comes directly from the estate.

What Can You Be Taxed On After Death?

The government has the ability to tax you on certain assets you owned when you were living. This includes things like your car, a cabin, or cottage. It’s worthwhile to note that your principal residence is an exception and will not be taxed upon your passing.

Non-registered capital assets are deemed to have been sold for market value just before you pass. Should any of these assets have an increased market value since they were purchased, you're subject to taxation of 50% of that value increase — otherwise known as capital gain.

In layman’s terms, let’s say you bought a Porsche from the 1980s. If you bought that car for $50,000 back then and it’s now a rare vehicle worth $150,000 in today’s market, you’re going to owe some taxes. It’s also important to recognize that physical assets such as cars or cabins aren’t the only things you can be taxed on.

You can be taxed on things such as businesses, investments, and even your Registered Retirement Savings Plan (RRSP). Again, fair market value applies to the RRSP, and it's taxed at regular applicable personal income tax rates. There's no special rate for capital gains earned through an RRSP. 

How Estate Planning Can Help

While there are currently no inheritance or estate taxes in Canada, planning ahead can help avoid any other tax complications that may halt you from passing your wealth down to beneficiaries.

Estate planning is a crucial step in the process. Speaking with a financial advisor and setting up a long-term plan will help you stay the right financial course. This way, you won’t accidentally spend an entire inheritance or pile up a massive amount of debt. Financial advisors can guide you accordingly and help you make the best decision for you and your beneficiaries.

Navigating tax issues after death can be tricky, that’s why we’re here to help. Our trusted team of financial advisors will give you all the information you need to make the best decision for your loved ones when you pass. Contact us today!

Ocean Wealth