No inheritance taxes in Ontario
There are no inheritance taxes in Ontario.
In other words, there are no taxes that a person who inherits from an estate must pay.
Beneficiaries do not pay tax on the money they inherit from an estate.
Taxes payable by an estate
There are taxes some taxes that the estate must pay – ‘estate taxes’ perhaps, although more accurately, mostly normal income taxes.
These ‘estate taxes’ are payable by the estate (by the executor).
These taxes reduce the estate, and should be paid before any distribution of the estate to beneficiaries (inheritors).
The key taxes payable on death in Ontario by the estate are:
- Estate Administration Tax (otherwise known as probate tax or probate fees) – approximately 1.5% of the value of the estate (use our probate fees calculator to approximate the amount of Estate Administration Tax payable). This is the only true ‘estate taxes’ payable in Ontario.
- Income taxes due for the year of death. These are the personal income taxes of the deceased, albeit with the taxable income including any unusual ‘income’ that occurs because of the death.
- Income taxes for any trusts (for instance, the estate from the time of death until distribution). These a income taxes payable on income earned by the estate (for instance, in interest earned on GICs or savings accounts by the estate from the time of death to the time of distribution).
Note that Estate Administration Tax is a tax on the asset value of the estate. Assets that pass outside the estate – for instance, a home owned jointly with a spouse – do not trigger this tax. Proper tax planning before death can substantially reduce or even eliminate Estate Administration Tax. After death, depending on the circumstances, it is from time to time possible to avoid probate entirely or reduce the amount of Estate Administration Tax if the estate can be reduced before probate. Contact us for more information.
The other taxes are income taxes. They are not taxes on the assets or capital value of the estate – they are taxes on the income received either by the deceased (in the last year of life) or by the estate. For instance, cash in a bank account is an asset and not income and thus will not normally trigger additional income tax. Interest received on savings is income and is taxable. Life insurance proceeds are generally not taxable. Conversely, however, a RRIF or RRSP is ‘collapsed and brought into the income of the deceased’ and thus the full amount is taxable income in the year of death (unless the RRIF or RRSP is ‘rolled over’ tax free to a surviving spouse or dependent child).
In Canada there is no income tax payable on the gain in value of the ‘principal residence’, but capital gains are taxable on other real estate including second homes (whether in Canada or outside), cottages, rental properties, etc.
Assets that pass outside the estate such as RSPs, TFSAs, life insurance and jointly held property reduce the value of the estate available to pay tax, but do not reduce the amount of tax payable. Accordingly, it is important to ensure that any planning done to avoid Estate Administration Tax (‘probate taxes or fees) does not deplete the estate and negatively affect the beneficiaries, or worse, make it impossible for the executor to pay the taxes due.
Executor’s liability for taxes
The estate trustee is personally liable for the taxes due by the estate. Therefore, the estate trustee absolutely must calculate and pay the income taxes due and obtain a clearance certificate before distributing the estate to the beneficiaries.
Preparing the tax returns for the last year of the deceased and for the estate are complex and unusual. We provide these services at very nominal cost. Please contact us for more information.