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Inheritance Tax in BC: Comprehensive Guide

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The death of a loved one can take a major emotional toll. Will the death of a loved one also take a big financial toll? Let’s talk about Canadian inheritance tax, estate tax, probate fees, and other financial considerations that can impact estate assets and the lessen the inheritance received by beneficiaries.

We will also talk about ways our estate planning lawyers can help you reduce the tax burden on your estate and why its worth your while to do some estate planning now to protect your loved ones in the future.

Inheritance Tax in Canada

Do you pay inheritance tax in Canada?

Inheritance Tax in Canada

It may surprise you to learn that Canada does not have an inheritance tax. Up until 1971, inheritance taxes were charged in Canada. In 1972, Canada’s inheritance tax rates were reduced to 0%. 

However, at that time, federal income tax rules were changed to provide for a capital gains tax that applies to certain types of assets on death (more on this below).

Do you pay inheritance tax in BC?

No. British Columbia does not impose an inheritance tax. The BC government followed the federal government, getting rid of gift taxes and succession duties in BC in 1977.

How much money can be gifted tax free in Canada?

There is no limit on how much money you can gift during your lifetime or leave to someone in your Will. A cash gift or inheritance is tax-free in the hands of the person receiving it. The recipient doesn’t have to pay taxes on money and doesn’t have to report it as income.

What taxes are payable on death in Canada?

What taxes are payable on death in Canada?

While there is no inheritance tax to be paid by the beneficiaries of an estate in Canada, that does not mean inheritances are immune from taxation. This is because any amounts due on death are charged to the deceased’s estate. The two main levies charged against an estate are income taxes and probate fees.

Income taxes and probate fees are applied before the estate is distributed to the beneficiaries named in your Will (or to your heirs if you die without a Will). In other words: the inheritance your loved ones receive is not taxable in their hands because it has already been taxed as part of your estate. 

Put in yet other terms: your loved ones’ inheritances will be reduced by your estate’s final income tax bill and any probate fees that must be paid. For that reason, it is worth doing estate planning now to reduce tax implications and probate fees.

Let’s look at income taxes and probate fees in greater detail.

Understanding taxes on a deceased person’s income

Understanding taxes on a deceased person's income

Final income tax return

When a person dies, their executor or administrator has to file a final income tax return on their behalf. The final tax return must include any income the deceased person earned in the year of death, including employment income, Canada Pension Plan (CPP), Old Age Security (OAS), retirement pensions, and dividend income. For example, if the deceased worked up from January 1st until their death on June 1st, the return must report employment income for those months.    

The final return must include all forms of taxable income, which is where the capital gains tax we mentioned earlier comes into play.

Capital Gains on “Deemed Dispositions”

Capital gains tax is the tax that must be paid on profit earned when you sell an asset or an investment at a higher value than its original purchase price. When a capital gain occurs, it must be reported to the Canada Revenue Agency (“CRA”) as income. 

When you die, Canada’s Income Tax Act treats certain property owned at the date of death as though it was sold at fair market value right before death, even though there is no actual disposition or sale. That includes real estate, personal property with a fair market value of $1,000 or more, investment portfolios, and business assets. The CRA calls this a “deemed disposition.” One-half of the capital gain is taxable as income, referred to as a taxable capital gain, unless one of the exceptions discussed below applies.  

The Income Tax Act also deems registered investments like RRSPs and RRIFs as being withdrawn or cashed in at the date of death. Amounts must be included as income in the final tax return and fully taxed as income, unless one of the exceptions discussed below applies.

How do I avoid capital gains tax on inherited property in Canada?

How do I avoid capital gains tax on inherited property in Canada?

There are several exceptions to tax liability that would otherwise be incurred by your estate. For example:

  • Capital gains on your principal residence are not taxable.
  • The amount in your Tax-Free Savings Accounts (“TFSA”) is not taxable.
  • The death benefit paid out of a life insurance policy to a designated beneficiary is not taxable.
  • Provided certain conditions are met, the deemed disposition rule doesn’t apply when non-registered capital property (e.g., securities, mutual funds, personal property, or real estate like a home, cottage, or investment property) is transferred to your surviving spouse or common law partner after your death. Tax is deferred, as the capital gain is postponed until your spouse or common law partner sells or is deemed to sell the property.
  • Provided a “qualifying survivor” has been named as a beneficiary of your registered investments (e.g., RRSP, RRIF), then the income from these investments is not reported on the estate’s final income tax return. A “qualifying survivor” is your spouse or common law partner, a financially dependent child or grandchild of yours who is under 18 years of age, or a disabled child or grandchild of any age.
  • If your estate makes a profit from selling a small business, a farm property, or fishing property, the Lifetime Capital Gains Exemption may apply to eliminate some or all of the taxable capital gains.

Depending on your situation, there may be other ways to minimize taxes payable by your estate. Understanding which property is taxable and when taxes can be deferred is the best place to start developing your tax-efficient strategy. If you are concerned about the amount of income tax your estate might face, contact our estate planning team today.

Understanding probate fees

Understanding probate fees

What is probate and why is it necessary?

Probate is the legal process for settling the estate of a deceased person. Essentially, probate is a court application to validate the Will, or to be appointed administrator of the estate if the deceased died without a Will. Probate is needed to authorize the deceased’s representative to act on behalf of the estate and transfer the deceased person’s assets to their heirs after death.

However, probate is not always required, depending on the size of the estate, the type of assets owned, and how the assets were owned. 

For example, property held in a trust, property/assets owned jointly, and assets that contain named beneficiary designations such as TFSAs and RRSPs do not pass through the estate and don’t require probate.

How much are probate fees and who pays them?

Probate fees are an estate tax based on the overall value of the estate. In BC, probate fees are based on the gross value of the estate that passes through the hands of the executor or administrator.

There is no probate fee or court fee on the first $25,000 of estate assets. If the estate is worth over $25,000, there is a $200 court filing fee and probate fees are assessed as follows:

  • A rate of 0.6% applies to the value of estate assets between $25,000 and $50,000; and
  • A rate of 1.4% applies to the value of estate assets exceeding $50,000.

This works out to roughly $14,000 on each million dollars worth of estate assets. Please see here if you would like to try out our probate calculator. 

The deceased person’s estate is responsible for paying probate fees. Its easy to see how probate fees can deplete an inheritance. The good news is that there are ways to reduce probate fees in BC.

How do I reduce probate fees in BC?

For a deceased person who died ordinarily resident in British Columbia, the probate fee is assessed on the value of real property and personal property of the deceased located in BC, as well as the value of intangible personal property of the deceased that is located anywhere else in the world. Intangible personal property includes bank accounts, stocks, life insurance, and other intangible assets.

As mentioned above, probate is not always required. Even if probate is required, there are ways to avoid probate fees if you do some smart estate planning in advance. Here are ways to reduce or avoid BC probate fees:

  • Use beneficiary designations to name a specific beneficiary or beneficiaries for your RRSPs, RRIFs, and life insurance policies. Your named beneficiary will receive those assets directly without the need for probate.
  • Consider holding assets such as bank accounts or real property such as homes, cottages, investment properties, etc. in joint tenancy with another person (i.e. the intended beneficiary of your estate). Ownership of assets in joint names means that the asset automatically passes to the surviving joint tenant when the first joint owner dies (this is known as the “right of survivorship”), without the need for probate.
  • Set up trusts to hold assets such as real estate or investments. Alter ego trusts and joint partner trusts are great examples. Assets held in trust do not form part of your estate at your death, so they are not subject to probate.
  • Prepare and execute multiple Wills. For example, if you are a business owner, you can prepare one Will for your personal property that will be probated and another Will to bequeath the corporate shares you hold. The second Will does not require probate, saving your estate from paying probate tax on the value of the shares.

Role of Legal Counsel in Estate Planning

A good estate plan can reduce or defer income taxes your estate must otherwise pay and minimize the impact of probate fees on your estate and your beneficiaries. 

Contact the experienced estate planning lawyers at Onyx Law Group at (604) 200-6712 for advice and assistance on estate planning and inheritance tax.

Have questions about a topic?

Onyx Law Group represents clients in family law, estate and trust litigation, estate planning and probate matters. Consult with our experienced team at 
(604) 900-2538


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