What is Inheritance Tax in Canada

Inheritance tax refers to wealth transfer taxation applied to the bequests and gifts that taxpayers receive. This type of tax differs from gift and estate taxes, with the tax rate depending on the amount of bequests received by the taxpayer rather than what the donor has bequeathed. The average tax rate in states that have adopted inheritance tax legislation is at around 30.5 percent. The top marginal rate paid by children and spouses goes as high as 70 percent in Japan while the rate is just 15 percent in Hong Kong. Countries that have no inheritance or death taxes include Argentina, China, Mexico, India and Indonesia. Among the few industrially advanced countries that don’t require inheritance tax are Australia, Canada, and New Zealand. Canada has no inheritance taxes since 1987 when they were repealed by the government of Pierre Trudeau. However, the income of estate properties that have been inherited is subject to income tax.

When a person passes away, no tax is payable for cash held in the bank. However, many people own capital assets (e.g. real estate and stocks) which are deemed sold at fair market value before their owner had passed away. The final return should contain all resulting capital losses or gains.

Deemed disposition can be avoided by leaving all assets to your spouse. Under Canadian tax legislation, a spouse is any person to whom one is legally married as well as one’s common law spouse. Any person with whom one has lived in a conjugal relationship over a period of at least twelve months is considered a common law spouse. If two people have a child together, they don’t have to meet the time requirement. In this case, both persons are automatically deemed spouses. Upon leaving assets to one’s spouse, it is considered that a person has sold them at their original cost prior to his or her death. Taxes are deferred until one’s partner sells or disposes of the assets.

Another option is to entrust one’s assets to a testamentary trust rather than leave them to heirs. A trust is set for the intended beneficiaries and a specified portion of the assets transferred to the established trust. Any appreciation of the owned assets is subject to taxation, but there is a loophole which helps reduce the taxes payable on future income that is earned by the assets. Investment income that is earned on assets is taxed in the testamentary trust which is regarded as a separate entity. The trust benefits from lower tax rates and what is even better, separate trusts may be set up for all beneficiaries. In this way, the amount of money that is subject to taxation in the lowest bracket is maximized.

Charitable donations also reduce the payable taxes on one’s final tax return. Bonds, stocks, mutual funds, and other securities may be donated. The donation of investment instruments to charities reduces the tax on capital gains by half.



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