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. Please note the blog posts are time sensitive and subject to changes in legislation or law.

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.