A death in the family is a difficult experience to endure on its own. Additionally, financial implications make the situation even more of a burden to handle. That’s right — someone has to manage the affairs of the estate when someone passes on. Inheritance wishes and tax obligations can clash, families argue due to the emotionally charged situation, and sometimes, people feel confused about how to proceed with the estate once someone passes. Curious about how estate taxes in Canada work? We’ll help illuminate some of your obligations by describing estate taxes in Canada, what to expect, and how to file your estate tax return.
Table of contents
- Are there estate taxes in Canada?
- Are legal fees for estate planning tax deductible in Canada?
- Are executor fees tax deductible to the estate in Canada?
- How do I file an estate tax return in Canada?
- How to avoid estate tax in Canada
- Estate Tax Planning
Are there estate taxes in Canada?
Here’s the good news: Canada doesn’t have a dedicated estate or inheritance tax on the federal or provincial levels. Only a few states in the US impose taxes like these, like Hawaii, Connecticut, Vermont, and New York, which is why Canadians sometimes believe there is an estate tax. On the contrary, no province or territory in Canada has an estate tax.
However, that doesn’t mean one’s estate is off the hook completely. Upon someone’s death, their estate is likely to owe some taxes to the Canada Revenue Agency, be it through capital gains or income tax. Of course, there’s also the estate administration tax to consider. In other words, an estate is taxed one final time when the owner passes away. From there, the estate is distributed to beneficiaries.
What is estate tax in Canada?
The closest thing to an estate tax in Canada is the estate administration tax, also commonly referred to as probate tax. This tax is applied by the provincial or territorial government to process your estate. Below is a breakdown of the estate administration tax by province and territory:
|Province/Territory||Estate Administration Tax/Probate Fees|
|Ontario||– Applies on estates worth $50,000 or more|
– $15 for every $1,000 (or part thereof) of the estate value over $50,000
|Alberta||– $10,000 or under: $35|
– $10,000 to $25,000: $135
– $25,000 to $125,000: $275
– $275,000 to $250,000: $400
– $250,000 or more: $525
|British Columbia||– $25,000 or less: $0|
– $25,000 to $50,000: 0.6% of estate value
– $50,000 or more: $1.4% of estate value
|Saskatchewan||– $7 on every $1,000 of value passing through the estate|
|Manitoba||– $10,000 or less: $70|
– $10,000 or more: $70 plus $7 per $1,000 over $10,000 of estate value
|Quebec||– $65 for application of probate|
|Nova Scotia||– $10,000 or less: $85.60|
– $10,000 to $25,000: $215.20
– $25,000 to $50,000: $358.15
– $50,000 to $100,000: $1,002.65
– $100,000 and over: $1,002.65 plus $16.95 per $1,000 over $100,000 of estate value
|New Brunswick||– $5,000 or less: $25|
– $5,000 to $10,000: $50
– $10,000 to $15,000: $75
– $15,000 to $20,000: $100
– $20,000 or more: $5 per $1,000 of estate value
|Prince Edward Island||– $10,000 or less: $50|
– $10,000 to $25,000: $100
– $25,000 to $50,000: $200
– $50,000 to $100,000: $400
– $100,000 or more: $400 plus $4 per each $1,000 of estate value
|Newfoundland and Labrador||– $1,000 or less: $60|
– $1,000 or more: $60 plus $0.6 per $100 of estate value
|Nunavut||– $10,000 or less: $25|
– $10,000 to $25,000: $100
– $25,000 to $125,000: $200
– $125,000 to $250,000: $300
– $250,000 or more: $400
|Northwest Territories||– $10,000 or less: $30|
– $10,000 to $25,000: $110
– $25,000 to $125,000: $215
– $125,000 to $250,000: $325
– $250,000 or more: $435
|Yukon||– $25,000 or more: $140|
Upon someone’s death, their estate still needs to complete a tax return. This is where the final taxation of the estate occurs. This isn’t exactly estate tax, but rather the final taxes the estate pays upon the death of the owner.
What is an estate tax return in Canada?
The executor or legal representative of the estate is responsible for filing a tax return upon their death for their estate. While they might have to file a few different returns, the most pressing is the final return. These are sometimes accompanied by optional returns and trust returns, which cover income that may not be eligible for declaration on the final return. Furthermore, all three tax returns together can help reduce tax liability. The final return is vital in learning whether the estate owes income taxes. Then, those taxes must be paid from the estate before any beneficiaries receive an inheritance.
What percentage is estate tax in Canada?
Since there is no estate tax in Canada, a percentage does not apply. However, the estate may have to go through probate which triggers a fee. The exact percentage or amount of the fee depends on the province or territory in which you reside.
Otherwise, the only taxation you have to worry about with an estate is the final tax return. In essence, these are the taxes the estate owes up to the date of the deceased estate holder.
How is an estate taxed in Canada?
Canada doesn’t have a set estate tax. However, the country requires a final return from every estate upon one’s passing to determine income tax obligations at death. In addition, a probate fee may apply to finalize the estate and inheritance to beneficiaries.
Related Reading: Estate Planning Checklist for Canadians
Are legal fees for estate planning tax deductible in Canada?
No, legal fees are only deductible in Canada when they are incurred to gain income. For example, you can’t deduct legal fees from employment income, unless they were incurred by you to gain salary or wage payments due to you.
The only way legal fees might be deductible in relation to an estate is if the estate is sued to gain a greater inheritance from it. However, this is a complex tax issue so it’s wise to consult a financial advisor or accountant to ensure your legal fees are tax deductible.
Are executor fees tax deductible to the estate in Canada?
Unfortunately, executor fees are not tax deductible to the estate in Canada. These are considered personal expenses and therefore aren’t eligible for tax benefits.
How do I file an estate tax return in Canada?
Here are some simple steps outlining requirements for filing an estate tax return in Canada:
- Basic information: Plug in the date of death, marital status address, and place of residence in their proper places on the return. You’ll also need to write “The Estate of the Late” before the deceased person’s name.
- Income: Fill in income information for foreign, employment, Old Age Security, Canada Pension Plan, QPP, EI, pensions, investment income, capital gains, RRSP, RDSP, and any other income that applies.
- Capital gains and losses: If any assets were disposed of, a capital gain or loss may apply. In addition, some deemed dispositions may apply when a person passes away which should be reported here as well.
- Tax deductions: You’ll need to address any deductions from childcare expenses, RRSP tax deductions, union dues, CPP deductions, income splitting, and COVID-19 repayments.
- Taxable Income: Once you’ve plugged in income, capital gains and/or losses, and any applicable deductions, you’ll arrive at taxable income.
- Federal and provincial tax: The tax payable will be determined using the taxable income amount.
- Tax credits: The total tax payable can be reduced by tax credits the taxpayer is eligible for.
- Net tax: After tax credits are applied, you’ll arrive at a tax payable or refund balance.
- Sign and seal the deal: Legal representatives must sign the final return’s last page. Include your name and title (administrator or executor).
Need more information? Check out the CRA’s web page about Preparing Returns for Deceased Persons.
Estate Tax Return Due Date in Canada
The estate tax return due date depends on the date on which the estate owner died:
- If the death occurred between January 1st to October 31st, the return is due April 30th of the following year.
- If the death occurred from November 1st to December 31st, the return is due six months after the date of death.
How to avoid estate tax in Canada
Of course, you might contemplate ways to pay as little taxes as possible as you manage your estate plans. Here are a few tactics to minimize your obligation:
- Joint property and accounts: Do you and your spouse own properties and bank accounts separately? You might consider adding one another to each title or account to avoid estate taxes upon one’s death, as one co-owner will still be alive. In this case, the co-owner would automatically assume ownership of the property and/or bank accounts without having to go through probate.
- Keep estates under the limit: You don’t have to pay the estate administration tax on estates valued under a certain threshold based on your province or territory of residence. You might pass on assets to your children, spouse, or family members while you’re still alive to keep your estate value low.
- Disperse gifts over a few years: Some estate owners might wrongfully assume a property gift to their kids will exclude them from estate administration or income tax. That’s not the case; however, you might reduce your liability by gifting smaller amounts of money over the course of a few years.
- Consider life insurance: If you die, you might not be on the hook for estate taxes; however, the estate will certainly be responsible for any income tax owed. Consider picking a life insurance policy to cover the excess costs in the event that your estate can’t pay.
- Carefully select executors and powers of attorney: Don’t just pick a close relative for the sake of picking someone in the family. Think long and hard about who you would trust to carry out your decisions once you’ve passed — consider whether they’ll be around themselves. These people should reflect the judgment and values you’d have if you were carrying out the will yourself.
Related Reading: How to Create and Build Generational Wealth in Canada
Estate Tax Planning
A death in the family is enough to cause stress and heartbreak. Tack on financial issues from a poorly managed estate, and you’re left with an even more stressful fiasco. Our advice? Start estate planning early and think about who you would trust to help handle your affairs. Try your best to plan for the upcoming taxation and reduce your liability upon death where possible.
Read More: What is an executor of a will?