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How to Manage Inheritance Tax in Canada

inheritance tax

In Canada, there are no taxes that apply directly to inheritances. However, this does not mean that property and assets left to beneficiaries are not taxed.

There is no inheritance tax charged to beneficiaries, but by the time assets are distributed to them taxes have already been paid by your estate.

With proper planning and a fully comprehensive estate plan, including a will, you can manage the tax effect on your estate and maximize the assets passed on to your heirs.

How Your Estate Will Be Taxed After You Pass Away

After you pass away, your estate will be taxed one last time before your beneficiaries receive their inheritance. A final tax return will need to be filed before your assets can be distributed.

Things that will be included on the final tax return include:

  • Any outstanding income until the day of your death.
  • Capital gains on assets you owned, which are considered to be sold on the day of your death (Deemed Disposition Tax).
  • Capital gains on real estate properties beyond your principal residence.

As there is no inheritance tax in Canada, your beneficiaries themselves won’t pay any taxes on what they inherit from you.

Understanding how your estate is taxed can help you structure your assets, insurance policies and trusts, and registered accounts to manage the financial stress of your heirs.

Estate Planning Strategies to Relieve Stress and Manage Taxes for Your Inheritors

Jointly Owned Assets

Any assets jointly owned by you and your spouse are distributed to your spouse tax-free, even without the direction of a will.

Other assets such as pensions, RRSPs, RRIFS, and TFSAs can pass directly to a spouse without being specified in your will as long as your spouse is named as the beneficiary.

Leave a Legacy Gift

When you make a charitable donation in your will, the contribution is tax deductible. This can be included as a tax credit on your final income tax return to reduce the overall taxes on your estate.

Giving Gifts to Beneficiaries

Since you will be deemed to have disposed of your assets at the time of your death, it might be better to dispose of some assets before your death by giving them to your intended beneficiaries. This may be advisable as long as the tax consequences are not prohibitive for the beneficiaries, and you do not need those assets to fund your day-to-day needs.

Buy Life Insurance

Life insurance can help your heirs fund your estate’s tax liability. Life insurance flows directly to the policy beneficiaries, which also reduces the amount in your estate that may be taxable.

Avoid Probate

Probate can be costly and time-consuming, including court costs, executor fees, legal fees, accounting fees, and even asset appraisal fees. By avoiding probate, your estate can save a significant amount of money that would otherwise be spent covering these costs.

It is important to keep in mind that any information that is revealed in probate court is available publicly thereby reducing your privacy.

In Conclusion

If you don’t plan your estate with tax management in mind, the impact of income taxes on your inheritable assets can be considerable. With some planning and a will, you can reduce a lot of the stress for your beneficiaries during a difficult time. Establishing an estate plan including trusts and insurance can go even further to maximizing the assets you can pass on to your heirs.

Since 1985, Bloom Investment Counsel, Inc. has been providing personalized investment management services for wealthy individuals, family offices, foundations, corporations, institutions, and trusts. We are pleased to partner with our clients’ trusted financial partners such as lawyers and accountants to help protect, preserve and grow their wealth.

This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.

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