When a loved one passes, taxes are the last thing on your mind. Nevertheless, taxes are part of the administration of a deceased’s estate. If you are not a Canadian resident and you are expecting inheritance money, or you are a Canadian resident who is looking to plan your estate and you will have non-resident beneficiaries, it may not be clear how Canadian inheritance tax laws will affect you.
Many countries impose inheritance taxes, even on foreign inheritances. However, there is no direct inheritance tax that Canada imposes on beneficiaries. Yet because Canada imposes estate taxes on a deceased’s estate, your inheritance may still have tax implications. To summarize, non-residents do not pay inheritance tax in Canada, but they may owe capital gains tax on inherited property located in the country.
If you are a non-resident of Canada and you are expecting an inheritance, sound legal advice is critical. Similarly, to protect your estate, and to make sure you pass on as much as you can to non-resident beneficiaries, it is strongly advised to seek legal advice to make estate planning as smooth and effective as possible. The wills and estates lawyers at Onyx Law Group have the experience and expertise necessary to assist. Schedule a consultation with us today, and allow use to help you get your estate planning in order.
Today’s blog will cover the nature of inheritance taxes in Canada and how non-residents are particularly affected. This will include a discussion of the “deemed disposition” rule, and how this works in practice. We will also explain steps that can be taken to minimize the tax burden faced by any non-resident beneficiaries.
What Is Inheritance Tax in Canada?
Canada has no direct inheritance tax. But there are tax consequences when someone passes away. In Canada, the Canada Revenue Agency, or CRA, uses a concept called “deemed disposition” to determine the taxes on the deceased’s estate. The CRA deems the deceased’s assets to have been “sold”, at fair market value, at the time of death, and so there is very likely to be tax consequences on the estate.
How Non-Residents Are Affected by Estate Taxes
There are also some significant differences in how residents and non-residents are treated when it comes to inheritances. One is that the Income Tax Act requires an executor to withhold a non-resident tax of 25% prior to the distribution of taxable Canadian property to the non-resident. This tax may ultimately be less than 25% if there is a tax treaty between Canada and the non-resident’s home country. Of course, each country treats foreign inheritances differently, and so there may also be foreign tax credits available.
Another difference is how capital property is handled when the beneficiary is not a resident of Canada. Capital property under the Income Tax Act is any property which, if sold, would result in a capital gain or loss, such as stocks and mutual funds. An estate may distribute such property to Canadians on a tax-deferred basis, meaning that any increase in value can be “rolled over” to the beneficiary so the estate does not realize capital gains on inherited property, and the beneficiary defers taxes on that property.
There may also be an exemption for a deceased’s principal residence. For instance, if a principal residence is left to a surviving spouse or common law partner, the property can remain a principal residence, which can exempt it from capital gains taxes until it is sold. This is called the principal residence exemption.
However, these are not available to non-resident beneficiaries. Nevertheless, non-residents may still receive certain property—such as a house—on a roll-over basis, since such inherited property is situated in Canada and remains subject to Canadian taxation.
Also, if a non-resident receives an inheritance from an estate in which more than 50% of the fair market value is derived from Canadian real property, the estate must obtain a “clearance certificate” and withhold 25% of the value.
What Inheritance Taxes Do Non-Residents Owe in Canada?
As noted above, death is a taxable event, as all of a decedent’s assets are “deemed” to have been sold immediately before death. This “deemed disposition” rule means that any capital gains on capital property, such as stocks, bonds, and investment properties, are realized upon death. Death may also trigger income tax on registered retirement income funds like registered retirement savings plans (RRSPs) and tax-free savings accounts.
While this will not result in a tax on a non-resident beneficiary, the estate settles these taxes prior to distribution, and thus the amount distributed to the beneficiary is still impacted by taxes. As well, if a non-resident inherits an income-producing asset, like rental property, the estate must withhold 25% of the gross rental income generated by that property before distribution.
Thus, the other possible taxes, or fees, of which one ought to be aware are:
- Capital Gains Taxes: Because of the “deemed disposition” rule, there may be a capital gains tax on estate assets that are realized on death and paid by the estate.
- Probate Fees: Technically, these are not taxes, but rather administration fees paid to the province; however, they function like an estate tax. The size of the fee varies by province, but is usually a percentage of the estate’s gross value. The estate pays the fee, not the beneficiary.
- Interest income: if you invest your inheritance in Canada and earn interest income, this may be taxable income for which tax will be owed.
- Double Taxation: a non-resident beneficiary may face tax consequences in their home country, unless there is a tax treaty with Canada.
How Should Non-Residents Report Inherited Canadian Assets?
Most reporting to CRA is handled by the executor. However, there are exceptions. For example, if a non-resident receives an inheritance where more than 50% of the fair market value of the estate came from Canadian real property, the estate and the beneficiary will be required to obtain a clearance certificate using Form T2062.
When Must Non-Residents Pay Taxes on Inherited Assets?
Generally, taxes on inherited assets are paid by the estate. That means a non-resident will not pay taxes upon receiving an inheritance. However, the income paid or payable to a non-resident beneficiary from a Canadian estate is subject to the above-mentioned 25% withholding tax. The deadline for this is the 15th day of the following month after the inheritance is given.
The deadlines for the clearance certificate depend on the circumstances. If, for example, an estate is made up only of a cottage, a non-resident beneficiary must obtain a clearance certificate either in advance of distribution or within 10 days of distribution. A failure to do this would be subject to a penalty of $25 per day up to a maximum of $2,500.
The deadlines for reporting taxable capital gains on estate assets will be determined as part of the deceased’s final tax return. The deadline for probate-related fees varies by province.
As you can see, there are many different payment deadlines that will arise during the course of the administration of an estate, and so it is critical to plan ahead to avoid fines and interest on unpaid taxes.
How Can Non-Residents Minimize Taxes on Inherited Canadian Assets?
There are ways to reduce the tax burden on inherited Canadian assets. One way is the use of trusts, like a cross-border trust. Another strategy is to give gifts prior to death, as Canadian tax laws allow a certain amount to be given tax-free. This can also reduce the size of your estate—and the taxes and probate fees payable. Life insurance is another way to deal with tax liabilities upon your death. When you die, a life insurance policy can provide the funds for any taxes.
You can also transfer assets into joint tenancy. Upon your death, the property would not pass to the estate but instead to the other joint tenant, thus avoiding probate fees on it.
Finally, hiring a tax professional familiar with Canadian tax law and estates is a critical and important way to plan your estate and minimize potential tax consequences.
How Estate Lawyers Assist Non-Residents in Canada
Estate lawyers can provide helpful advice and assistance to any non-resident of Canada who is, or expects to be, receiving inherited property. Estate lawyers can also assist with inheritance tax rules, including reporting requirements, and advise you about the forms required to be provided to CRA.
Most importantly, estate lawyers can provide the assistance needed to minimize your estate’s tax obligations and ensure that your beneficiaries receive as much as possible under the law. An experienced estate lawyer can also provide personalized estate planning, which accounts for potential pitfalls that arise where a beneficiary is a non-resident.
Looking for Estate Advice in Canada?
In summary, while Canada does not have a direct inheritance tax, taxes are still an important consideration. This is especially true where a beneficiary is a non-resident of Canada. For instance, executors must withhold 25% of the value of a non-resident’s share of the estate prior to distribution where the property is taxable Canadian property like real estate.
At Onyx Law Group, our Estate Lawyers in British Columbia can assist you with sound legal advice tailored to your unique circumstances. We welcome you to contact us today to arrange a consultation.
FAQs
Here are some common questions that non-resident beneficiaries of Canadian estates ask.
Is There an Inheritance Tax in Canada for Non-Residents?
There is no direct inheritance tax on non-resident beneficiaries. However, there are taxes that will affect how much a non-resident beneficiary inherits. For instance, prior to making a distribution of taxable Canadian property to a non-resident beneficiary, an executor must withhold and remit 25% of the value to CRA. If the non-resident beneficiary’s country of residence has a tax treaty with Canada, the amount can be less than 25%.
Can Non-Residents Inherit Property Without Paying Tax?
While a non-resident can inherit without paying any direct tax, there are still potential tax consequences. For instance, a non-resident cannot benefit from all of the “roll-over” tax deferments available to a resident beneficiary, such as a surviving spouse or common law partner, such as the principal residence exemption.
In practice, this means that the estate will likely have to pay a capital gains tax prior to distribution. An estate would also pay capital gains on assets like mutual funds, registered accounts, and registered investments prior to distribution. Also, where taxable Canadian property is distributed to a non-resident beneficiary, the estate will be required to withhold 25%.
As well, it is important to remember that each country treats foreign inheritances differently, and so there may be taxes that need to be paid to your country of residence. There may also be foreign tax credits available.
How Much Can You Inherit Without Paying Taxes in Canada?
As there is no direct inheritance tax, there is no limit to the amount a person can inherit before a tax will be owed by the beneficiary. Instead, it will be the estate that owes or withholds the taxes, and the amount owed will depend on the nature and value of the assets that form the estate.
Do Different Provinces Have Different Inheritance Tax Rules?
In Canada, estate taxes include both provincial tax and federal tax, payable by the estate. Each province manages the administration of estates in their province, and each has different fees as a result.
Can Double Taxation Be Avoided With Treaties?
Yes, it is possible to avoid double taxation where there is a tax treaty with Canada, but each country treats foreign inheritances differently. There may also be foreign tax credits available, depending on your country of residence.
How Is Inheritance Tax Different From Estate Tax?
Inheritance taxes are those paid by the beneficiary as a result of inheriting an asset, whereas estate taxes are those imposed on the estate based on the assets that form the estate.