Is an Inheritance Taxable in Canada?

Short answer: no. Canada has no inheritance tax, and you do not pay income tax on money or property you receive from an estate. BC does not have an inheritance tax either.

That does not mean a death is tax-free. Tax is generally paid by the estate before you receive anything, through the deceased person's final return, and BC charges probate fees on many estates. Here is how it works, and what changes when the inheritance comes from outside Canada.

Canada has no inheritance tax

The CRA lists "most gifts and inheritances" among the amounts you do not report or pay tax on. You do not owe income tax simply because you received money, a home or investments from someone's estate, and BC has no separate inheritance tax.

What happens afterwards is different. Interest, dividends, rent or capital gains that you earn on inherited property after you receive it are taxable in the ordinary way.

Where the tax falls instead: the final return

Rather than taxing beneficiaries, Canada taxes the person who died. Under section 70(5) of the Income Tax Act, a person is deemed to have disposed of each capital property immediately before death at its fair market value. Any capital gain, such as growth in the value of a rental property, a cabin or non-registered investments, is reported on the deceased's final return, and the executor pays the tax out of the estate. A few points change the picture:

• Spouse or common-law partner. Property that passes to a surviving spouse or common-law partner resident in Canada, or to a qualifying spousal trust, can generally roll over without tax until that person sells it or dies (s 70(6)). The property must vest in them within 36 months of the death.
• The family home. Some or all of the gain on a principal residence may be exempt, although it must still be designated on the final return.
• RRSPs and RRIFs. Their value is generally included in the deceased's income for the year of death, unless they pass to a surviving spouse or common-law partner or another qualifying beneficiary. Our guide to RRSP and RRIF beneficiary designations explains the choices.

By the time you receive your share, the estate should already have paid that tax or held back enough to cover it. That is why executors often wait for a CRA clearance certificate before the final distribution; see CRA clearance certificates for executors.

Your cost if you later sell

When you inherit capital property outside a spousal rollover, you are treated as acquiring it at its fair market value immediately before the death (s 70(5)(b)). If you sell later, your gain is generally measured from that value, so you pay tax only on growth after the death. Keep a record of the date-of-death value, such as an appraisal or the figure used on the final return.

BC probate fees are not an inheritance tax

BC charges a probate fee under the Probate Fee Act when an estate applies for a grant. It is paid on behalf of the estate before the grant issues, not by beneficiaries on what they receive. No fee is payable if the estate is worth $25,000 or less. Above that, the fee is $6 for every $1,000 or part of $1,000 between $25,000 and $50,000, plus $14 for every $1,000 or part of $1,000 over $50,000. Court filing fees are separate.

As an example, an estate valued at $500,000 would pay $150 on the band from $25,000 to $50,000 and $6,300 on the $450,000 above $50,000, a total of $6,450. The fee is based on property that passes to the executor, so assets that go directly to a surviving joint owner or a named beneficiary are generally not counted. Our guide to probate fees in BC walks through the calculation.

Inheriting from outside Canada

Canada does not tax you on receiving an inheritance from abroad either, but there are three things to check:

• The other country's rules. Some countries tax estates or inheritances. Whether tax was owed there is a question for the law where the person lived or the property is located.
• Foreign property reporting. If you are resident in Canada and the total cost of your specified foreign property is more than $100,000 at any time in the year, you must file Form T1135 with your return. For inherited property, the cost is its fair market value when you received it. Foreign bank accounts and shares count; personal-use property, such as a vacation home you use mainly yourself, does not. The CRA warns that penalties apply for filing late.
• Income from then on. Interest, dividends or rent the inherited property earns after you receive it is reported on your Canadian return.

When advice is worth having

Most beneficiaries have nothing to file simply because they received an inheritance. Advice is worth having if you are an executor dealing with the final return and clearance, if the estate holds property outside Canada, or if you are a beneficiary waiting on a distribution and want to understand your rights as a beneficiary in BC.

Inheriting from an estate in BC or abroad? Know what is owed first

Our probate and estate lawyers can explain what an estate must settle before distribution, help executors with probate and the steps toward a clearance certificate, and advise beneficiaries on estates that include property outside Canada.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.