The moment a person passes on, the Canada Revenue Agency (CRA) considers all of that person’s assets part of her estate, and deducts taxes from that estate. That generally means there are no tax ramifications if you inherit part of a loved one’s estate — as it has already been taxed. “In most cases, if you receive an inheritance, tax has been paid and you don’t need to report it as income,” says senior investment advisor John Pacheco, of London, Ontario. “Canada has no inheritance tax, and an estate’s taxes are settled before the remainder is distributed.”
Transfers to a spouse
When a spouse or common-law partner survives, many estate taxes are avoided in the short term, as most property transfers to the surviving spouse.
Real estate and investments roll over to the survivor.
- Registered retirement savings plans
- Registered retirement income funds
- Home and vacation properties, and others
The value of these assets at the time of death becomes the value of the assets for the surviving spouse, as long as she was a Canadian resident at the time of her spouse’s death and as long as the inheritance is completed within 36 months of the death.
How an estate is settled?
An inheritance payout depends on the settlement of the estate for the deceased person. Once the final income tax return for the person is completed, the executor may apply for a clearance certificate from the CRA, which certifies that all amounts the deceased taxpayer have been paid. Without it, the executor or any beneficiaries may be required to cover any amounts owed on the deceased person’s estate, if any, up to the value of the inheritance. Since the clearance certificate applies to all previous tax years, it represents that the deceased taxpayer is effectively settled up with the CRA and inheritances are free from any past obligation.
Which TurboTax Is Best for You?
When a loved one has passed, all the paperwork and legal jargon can seem a little confusing or daunting to deal with. But with the right information ahead of time, you can still navigate the tax waters to file your return with TurboTax Online.
However, if you feel a bit overwhelmed, consider TurboTax Live Assist & Review and get unlimited help and advice from a real person as you do your taxes. Plus, there’s a final review before you file. Or, you can choose TurboTax Live Full Service* and have one of our tax experts do you return from start to finish.
* TurboTax Live™ Full Service is not available in Quebec
References & Resources
- TurboTax: Canada Inheritance Tax Laws & Information
- TurboTax: Deceased Returns: The Final Return
- CRA: Preparing Returns for Deceased Persons 2020
- CRA: Property you inherit or receive as a gift
- Comstock/Stockbyte/Getty Images