Are There Death Taxes?

Technically speaking, no. There aren’t. But there’s more to the story.

 

In Canada, we don’t get taxed on wealth or the value of an inheritance. But we pay tax on income earned both before and after we die. We also pay taxes for services and transactions.

 

So ultimately, your estate will have to pay taxes. But you can reduce them by planning your estate properly.

 

Income Taxes

When you die, two taxpayers are created: you and your estate.

 

You have to pay income taxes right up to the day you die. Afterwards, your executor needs to file a terminal income tax return. If that doesn’t happen, there can be consequences:

 

  • Your executor could be held responsible for taxes owing
  • If you’ve left property to anyone, they could be held liable

Remember: Immediately after you die, your estate must start paying tax on income earned on your assets.

 

Capital Gains

Did you know that on the day before you die, you will sell all your capital property?

 

Well, at least that’s how the government sees it. It doesn’t matter whether you really do or not—that is how the tax laws work.

 

It’s called the “deemed disposition of capital property.” Usually, this creates a capital gain that is taxed against your estate.

 

Example:

 

  • On the date of your death, you owned a cottage property, some stocks and some RRSPs

The Canadian government says you sold all of it the day before. So, capital gains tax is calculated on the gain that would have occurred if you really did sell it.

 

Sound like fiction? In a way, it is a fiction that the government creates for its purposes. But the tax you pay will be real. However, there are some ways to reduce it, such as:

 

  • Personal exemptions
  • Creating capital losses
  • Using roll-over provisions of the Income Tax Act
All of these techniques are complicated and beyond the scope of this website. If you own any capital property, play it smart and consult your accountant, lawyer or financial planner about lessening your tax burden.
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