My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Wednesday, September 14, 2011

Income Tax on Inheritances

I often field calls from clients asking about the income tax consequences of an inheritance they are receiving or will receive in the future. The answer to the question is always the same; there are no income tax consequences in Canada to the recipient of an inheritance (save the obscure situation noted below). This statement holds true whether the inheritance comes from within Canada, the United States, Europe or anywhere else in the world.

I could end my blog right here, but as my readers know, I tend to write more rather than less, so I will take this subject down one level. Lynne Butler also has a very good blog on this topic and discusses the obscure situation where you may owe income tax on an inheritance.

Where income tax really rears its ugly head in respect of inheritances, is in the taxation of the deceased person. For income tax purposes, a deceased person is deemed to dispose of his or her assets at their fair market value on the date of death. These deemed dispositions can result in an income tax liability for the estate of the deceased, which will reduce the value of the estate and ultimately the inheritance.

It should be noted, that there is no deemed disposition of cash. Where the deceased owned capital property such as stocks, the stocks are deemed disposed of on the date of death, at their fair market value. The gain is measured from the initial purchase price of the asset. For example, if the deceased had purchased Bell Canada several years ago for $15 and the stock price on their date of death is $32, they will have a deemed capital gain of $17, even though they never sold the shares.

Where you have a depreciable asset such as real estate, the deceased may have “recapture” of prior depreciation claimed and a deemed capital gain. However, in cases where the principal residence was the only real estate property of the deceased, there will be no income tax exigible.

Where a deceased person owned multiple real estate properties, such as a home, cottage, vacation property or rental property, the principal residence exemption may be allocated partially to the other properties and thus, the deceased’s principal residence could be partially or wholly taxable.

In addition to the income tax owing on death, the deceased may owe income tax on any income earned from January 1st of the year of death to the actual date of death. This is known as the terminal income tax return. The estate may also owe income tax from the date of death until the assets are distributed to the beneficiaries.
The deceased's estate may also be liable for probate tax; see my blog on probate taxes for more details.

In the United States there is estate tax that can potentially reduce the amount of an inheritance from a US person or a Canadian person with US situs assets.

So in summary, there are no inheritance taxes in Canada, however, there are several taxes that may affect the ultimate inheritance received.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

14 comments:

  1. Mark, that was not only interesting but funny, I really liked the contract killer line.

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  2. Hey David thx, I think your comment was meant for the voluntary disclosure blog, but showed up here. Anyways, no one realizes how funny accountants really are :)

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  3. Thanks Mark...that confirmed a few things for me. Question re taxation of capital gains...since all capital of the deceased is deemed to be sold on the date of death, presumably the "income" of the estate could be very large in the year of death, pushing the estate into a higher marginal tax rate. Would it therefore be advisable, from a tax perspective, to begin selling stocks etc in the later part of your life to maintain a lower marginal tax rate on the capital gain? Just wondering if I'm missing something. Thanks.

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  4. Hi Anon, you are correct. Often the deemed disposition on death results in significant income tax on the terminal tax return and paying tax at the highest marginal rate. So depending upon your marginal rate in your later retirment years, it may make sense to smooth your income. However, that would mean going from equity to cash or money market etc and thus, you would need to consider the potential capital appreciation you would forgo if you sell your stocks and compare that number to the income tax you would pay in the year of death.

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  5. What about inheritances from the States? I am the beneficiary of a trust with properties (home, apartments, condos) that my mother set up and now there is a capital gain in the States as the properties have gone up in value since her death. Does it make any difference in Canada if the estate pays the capital gains in the US and then sends me a check? The properties were never in my name (although I was a deemed beneficiary of the trust).

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    1. Anon, you seem to be mixing up inheritances with distributions from a trust. For Cdn residents, inheritances are not taxable. In regard to the taxation of US trust distributions, way too complicated a topic to answer on a blog.

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  6. I have an odd scenario. My father passed away in 2011, and final income taxes were filed and the estate settled. In 2013 land that was in his family was indentified and listed for sale. The land is now sold and its 2014. My father would have been one of 11 family members to benefit from the sale. As his child, and the particulars of his will, I would be entitled to his portion of the sale of this land. What taxes are applicable in this instance? I have yet to find a scenario that fits this situation.

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    1. Hi Anon

      This is problematic. Technically your dads last return should have shown the land as an asset and reported a deemed gain or loss. You would then have inherited the land at that deemed price on his death and your 2014 gain or loss would be measured from that cost. Speak to an accountant as to how to fix or report this issue, there is a technical fix and maybe a practical fix depending upon the facts.

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  7. Hello! Looking for some insight into a stock inheritance - I've inherited 400 TD stocks this year (they were 200 but split in early January).....these stocks were purchased via an employee/employer option over the course of 25 years working....according to your info above I suspect the capital gains will be substantial. I was going to keep the stocks intact and sell when they increase in value however after reading your blog, I think I should sell them now and re-invest in my name. Thoughts? And do you have any idea how one would determine the actual purchase price of the stocks in this situation as I imagine I will need this info come tax time? Thank you!

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    1. Hi Anon

      If you inherited the stocks, the capital gains should have been paid by the deceased's estate, they are not your responsibility, only the gains from the date of inheritance are your responsibility.. You need to see if the final return of the deceased reflected the TD shares as sold and at what price (that becomes the cost of your TD shares). If that was not done, you need to speak to the accountant for the estate or speak to an accountant to sort it out..

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  8. Hello - part 2 of my previous question from earlier today - what adjustments are made for valuation from 25 years ago vs today? Ie - a stock purchased for $17 in the 80s is worth more than a stock at the same price today....just trying to decrease my potential capital gain pain! Thanks!

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    1. As noted above, your cost of the TD shares is the deemed sale proceeds on the deceased final return.If the gain was not reported, it needs to be sorted out

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  9. Hello Mark,
    I have a very interesting question for you:
    (interesting because I do deemed disposal without dying).
    I inherited real estate in Switzerland.
    Let's call it worth 200,000SFR, Mortgage 100,000 SFR.
    I also have a business here in Canada that has been quite successful.
    So I have left Canada, deemed disposal of everything is necessary etc.

    The 200,000SFR I inherited on Aug 26, 2015:
    It was worth on that day: 280,000CAD
    I left Canada on Dec 4, 2016:
    The 200,000 SFR was worth on that day: 262,000 CAD

    I have had a capital gain of my own business of 100,000CAD that I need to dispose of.
    Question:
    Does the CRA do it that way (by the date of the death of the person who I inherited from)?
    Or do they take the date of the distribution of the estate as the "received") date.
    Does the CRA have to accept the daily exchange rate for these inherited values at these dates?
    In other words, will they accept if me deduct 38,000 CAD from the 100,000CAD above and pay departure taxes on 62,000CAD?
    thank you
    Peter

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    1. Hi Peter

      Sorry I do not provide personal tax planning answers on this blog and your situation is a bit complex. U should get professional advice to ensure you minimize your departure taxes and file the required forms

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