In a recent episode of The Wealthy Life, Senior Trust Advisor Paula Lester explains how estates are taxed when someone passes and why understanding these rules is essential for effective estate planning.
Planning your estate can be an uncomfortable topic, but knowing how your estate will be taxed can make a big difference in what your beneficiaries receive.
Estate Taxes vs. Probate Taxes
Many Canadians confuse estate taxes with probate taxes, but they are very different:
Probate taxes are fees paid to validate a will through the court system. Most provinces charge probate fees (but not all), and those fees vary considerably from a low flat fee to a fixed percentage, and can be as high as 1.695% of the estate’s value. Find out your provinces probate fees here.
On the other hand, estate taxes are triggered when someone passes, and their assets are treated as if they were sold. This can lead to a large tax bill, especially if the estate includes valuable property or investments. Paula Lester emphasized that while probate fees often get the most attention, they are usually much smaller than the taxes owed from this deemed sale of assets.
What Is a Deemed Disposition?
When someone passes away, Canadian tax law treats all their assets as if they were sold on the date of death.
This includes:
For example, a cottage purchased for $40,000 decades ago and now worth $1 million would trigger a $960,000 capital gain, taxed accordingly. RRSPs or RRIFs worth hundreds of thousands of dollars are also fully included in income, often pushing the estate into the highest marginal tax bracket, which can exceed 50%.
This “all-at-once” taxation can create a significant burden, especially for estates with multiple high-value assets.
Spousal Rollover: A Tax Deferral Strategy
If the deceased has a spouse (married or common-law), assets left to the spouse can be rolled over tax-free, deferring taxes until the surviving spouse passes away. This strategy can reduce the immediate tax burden.
However, Paula noted that this can become complicated in second or blended marriages, where the surviving spouse may benefit from the rollover, but the children from a previous relationship may ultimately bear the tax burden when the second spouse dies.
Proper planning with legal and financial professionals is key to balancing family dynamics and tax efficiency.
Do Beneficiaries Pay Tax on Inheritance?
In Canada, there is no inheritance tax. Once the estate pays all applicable taxes, beneficiaries receive their inheritance tax-free. However, beneficiaries living outside Canada may face taxation in their own jurisdictions.
Should You Worry About Probate Fees?
While avoiding probate fees can be beneficial, Paula cautions against letting probate avoidance override broader estate planning goals.
Probate fees are relatively minor compared to estate taxes, and strategies to avoid them such as joint ownership or naming beneficiaries should be used with caution.
Final Thoughts
Paula Lester’s key recommendation is to work closely with both a lawyer and an accountant when planning your estate. This ensures your plan is not only tax-efficient but also aligned with your personal values and family dynamics. While minimizing taxes is an important goal, estate planning is about preserving your legacy, making sure your assets are distributed according to your wishes and that your loved ones are supported. A well-rounded, professional approach helps avoid unintended consequences and brings peace of mind for you and your beneficiaries.
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Disclaimer: The above article is for information purposes only. Always consult a financial professional
