Taxes
Updated March 2019
Canada had an inheritance tax until 1972. Since then, any money acquired via inheritance is seen as capital gain and taxed accordingly. But, things could change again.
Read on for an overview of inheritance tax in Canada.
How much can you inherit before paying inheritance tax?
Whether or not you pay taxes on an inheritance depends on whether or not it constitutes a capital gain. For tax purposes, when someone dies, the value of their property is evaluated at fair-market value. This estimated amount is called the deemed proceeds of disposition.
Deemed proceeds may constitute a capital gain or a capital loss. The proceeds or deemed proceeds of depreciable property or personal-use property cannot be claimed as a capital loss. With depreciable property, there may be a recapture of capital cost allowance or a terminal loss.
Recapture of capital cost allowance is based on undepreciated capital cost (UCC). This is the balance of capital cost subject to further depreciation at any time. The amount of CCA you claim each year will lower the UCC of the property.
A recapture of CCA is when the proceeds or deemed proceeds of disposition exceed the UCC. That amount is treated as taxable income.
A terminal loss is when the proceeds or deemed proceeds of disposition are less than the UCC. That amount can be deducted from income on the tax return.
Recapture of CCA and terminal loss
Example: A piece of machinery costs $10,000. The UCC for its capital cost allowance class is $6,000.
If the owner sells the machine for $4,000:
- No capital gain
- Subtract CCA claimed in previous years
- Subtract $4,000 -- the lesser of the proceeds of disposition minus related outlays and expenses; or the capital cost of the property -- from UCC of $6,000
- Result is a terminal loss of $2,000 ($6,000 - $4,000), deductible from business income
If the owner sells the machine for $8,000:
- Because it's still less than the original cost, no capital gain
- Subtract $8,000 (the lesser of the proceeds of disposition minus related outlays and expenses; or the capital cost) from UCC of $6,000
- The result is a recapture of CCA of $2,000 ($6,000 - $8,000) that must be included in business income
If the owner sells the machine for $12,000:
- Capital gain of $2,000 (since the original capital cost was $10,000)
- Subtract $10,000 (the lesser amount) from UCC of $6,000
- The result is a recapture of CCA of $4,000 ($6,000 - $10,000) that must be included in business income
You can find more information about recapture and terminal loss in the CRA document Income Tax Folio S3-F4-C1, Discussion of Capital Cost Allowance.
Rules on inherited property
Chapter 4, "Deemed disposition of property," in the CRA's Guide T4011, Preparing Tax Returns for Deceased Persons 2017, outlines current rules for inherited property. These rules apply only to property acquired after December 31, 1971. For information about a property that a deceased person owned before 1972, or about resource property or an inventory of land, call the CRA at 1-800-959-8281.
As mentioned above, the deemed proceeds of disposition apply to the value of an estate even if no sale of the property has taken place. Heirs are responsible for paying applicable taxes on certain capital gains.
A capital gain is when the proceeds or deemed proceeds of disposition of capital property are more than its adjusted cost base. The adjusted cost base (ACB) is the cost of a property, plus any expenses incurred in its acquisition, such as commissions and legal fees.
In general, you have to pay tax on one-half of the capital gain. See below for information on the capital gains deduction.
A capital loss is when the proceeds or deemed proceeds of disposition of a capital property are less than its adjusted cost base. You can claim one-half of a capital loss. Recall that with personal-use and depreciable property, you cannot claim a capital loss.
Claiming capital losses in the year of death
There are two ways to apply a net capital loss incurred in the year of death.
Method A: Carry back a net capital loss to reduce any taxable gains in any of the three years prior to the year of death. In 2017, no further adjustment would have been necessary because the inclusion rate was the same in 2014, 2015 and 2016.
Fill out "Section III - Net capital loss for carryback" on Form T1A, Request for Loss Carryback and send it to your tax centre to apply. Do not file an amended return.
An amount left over after the carryback might be used to reduce other income on the final return, the return for the year before the death, or both.
Subtract any capital gains deductions the deceased has claimed to date from the remaining net capital loss. You can then use this amount to reduce other income for the year of death, the year prior, or both.
To claim the remaining capital loss in the year of death, enter it as a negative amount in brackets on line 127 of the final return.
Method B: Instead of using the remaining net capital loss to reduce income from capital gains, you can use it to reduce other income for the year of death, the year prior, or both.
As with Method A, subtract any capital gains deductions the deceased has claimed to date from the net capital loss. Enter the difference as a negative amount in brackets on line 127 of the final return.
