Canada: Personal Taxation
Inheritance and Gift Taxes
There is no inheritance tax in Canada. Rather, on a person’s death, there is a deemed disposal of capital property immediately prior to his or her death, which becomes subject to capital gains tax. Liability to capital gains tax may be deferred where property is transferred to a spouse or to a spouse trust; the liability therefore arises on disposal of the capital asset by the spouse.
Note that where capital property consists of small business corporation shares, farm property and/or fishing property, the C$750,000 lifetime capital gains exemption can be applied.
A final tax return is completed on behalf of the deceased. However, it is possible to complete a further three “optional” tax returns for the following:
- Rights or things – these can include, for example, salary, vacation pay and commission owed by an employer at date of death; unpaid dividends declared before death; bond interest earned on a payment date before death but not paid or reported in previous years; (if the deceased was a farmer or fisherman under the cash method), livestock, harvested crops, inventory, supplies on hand and accounts receivable; and, in the case of a sole trader or if the deceased worked in a profession, work in progress.
- Where the deceased was a sole trader or partner, income received from the end of the business’s fiscal year to the date of death. For these purposes, the business’s fiscal year cannot be a calendar year.
- Income received by the deceased from a testamentary trust, on condition that he or she died after the end of the trust’s fiscal period but before the calendar year end.
These three optional returns can prove useful in reducing or eliminating the tax liability on the estate once the various permissible deductions are taken into account for each return.
Gifts of capital property are also deemed disposals, and the donor is therefore subject to capital gains tax. The person receiving a gift or inheritance, however, is not subject to income tax on their gain. Gifts from employers to employees, though, are likely to be regarded as a taxable benefit to the employee.