Table of Contents
- Tax Implications of Inherited Property in Canada
- Inherited Shares
- Capital Gains Tax
- Taxes in Case of Spousal General Rollover
- Taxes in Case of Inheritance Through Trust
- Probate Fees
- Tax on Inherited Funds of a Registered Account
- Tax on Inherited Tangible Assets
- Tax on Inherited Nonregistered Investments
- Taxes on Inherited Commercial Properties
- Tax on Insurance Money
- Tax on Inherited Secondary Residence
- Bottomline
Tax implications don’t announce their arrival.
Death taxes in Canada are not a thing for you to take lightly.
Theoretically, Canada has no inheritance tax because all the properties belonging to the deceased are considered to be disposed of at a fair market rate at his death. However, significant tax implications can arise on the inherited property, and it does not remain tax-free forever.
The following guide informs you how the CRA can knock at your door if you have inherited property.
Tax Implications of Inherited Property in Canada
- 1. Inherited Shares
Although there are many ways to inherit shares without payment of estate taxes, such as the pipeline method, there can be tax implications in the future.
For example, if the deceased’s final return settled the estate tax on those shares but they have increased in value, you will be liable to pay tax on the increase in value.
So, half of that increase in value was previously liable for taxes, but from July 2024 onwards, two-thirds of that increase will incur taxes.
- 2. Capital Gains Tax
The assets you inherit, whether through a trust or after the payment of taxes, will be considered bought by you, and whenever you dispose of them, you will be liable to pay taxes on the gain in value.
From July 2024 onwards, the CRA will consider 2/3 of your capital gains for the calculation of taxes.
- 3. Taxes in Case of Spousal General Rollover
While Spousal rollovers are an effective way to avoid estate taxes, they are not always tax-free. Whenever the surviving partner disposes of the inherited asset in life, he will be liable to pay tax.
- 4. Taxes in Case of Inheritance Through Trust
A testamentary or inter vivos trust is an effective mode of inheritance without estate tax.
However, whenever you sell your share in that trust, the CRA will require you to pay the taxes as if you had bought the property previously.
- 5. Probate Fees
Probate fees are taxes the government charges in return for administering the inherited property to the beneficiaries.
These fees can be as high as 1.5% of the total value of the assets. Therefore, you should hire an efficient executor so that he can do maximum to save taxes.
- 6. Tax on Inherited Funds of a Registered Account
A unique general rollover is available for registered accounts like Retirement Savings Plans (RRSPs) or Registered Retirement Income Funds (RRIF).
A spouse or a common law partner can transfer the assets to his account on a text deferral basis. It means that tax is not waived. Instead, it is only deferred. When you withdraw funds from these accounts, the tax will become payable.
- 7. Tax on Inherited Tangible Assets
Tangible assets like cash, jewelry, or antiques do not incur inheritance taxes. However, any income generated from such assets will be taxable. Similarly, selling such assets will also be taxable.
- 8. Tax on Inherited Nonregistered Investments
Non-registered investments generally roll over tax-free. However, like tangible assets, any income generated from such Investments will incur tax liability.
- 9. Taxes on Inherited Commercial Properties
Like other properties, a commercial property will also incur tax liability on any income the beneficiaries receive. Similarly, if you are a beneficiary of any commercial property, you must pay taxes to the Canadian government.
- 10. Tax on Insurance Money
Although insurance money is a great way to pay off taxes and is tax-free, it increases the overall value of your estate.
Because of this, you may have to pay more taxes in the future.
- 11. Tax on Inherited Secondary Residence
If you inherit a secondary residence that is not tax-free, you will be liable for estate taxes and, later, if you derive income from it or sell it, liability will arise.
Bottomline
The Canadian Revenue agency charges multipronged inherited taxes. Therefore, you should undertake effective estate planning with the help of an expert so that you can save maximum taxes on the inherited property.