Most Canadians aren’t ready for the tax side of inheritance

John’s Take:

Don’t be afraid to talk with your family about death and taxes.

Life insurance is often used to cover capital gains tax on inherited assets like businesses or real estate, preventing heirs from selling assets to pay taxes: H&R Block.

By Freschia Gonzales

Many Canadians expect to inherit wealth, but few understand the tax implications that come with it.

A new study commissioned by H&R Block Canada reveals that while 59 percent of Canadians anticipate receiving an inheritance, only 33 percent have a strong understanding of the related tax considerations.

Despite the fact that inherited money itself is not taxable, “that doesn’t mean inherited assets are tax exempt,” said Yanick Lemay, Tax Expert at H&R Block Canada.

When a person dies, the Canada Revenue Agency (CRA) treats their assets—such as real estate, investments, and registered savings plans—as if they were sold at fair market value, meaning taxes must be paid by the estate.

Despite the potential financial impact, most Canadians take a passive approach to inheritance planning.

The study found that 53 percent of Canadians have not discussed inheritance with family members, and 52 percent have not looked into how taxes might apply to them.

Nearly one-third of respondents (31 percent) believe it is too morbid to focus on inheritance tax considerations before receiving assets.

The findings reveal a significant knowledge gap in tax planning for inheritance.

Older Canadians report a better understanding, with 42 percent of those aged 55 and older saying they comprehend inheritance tax considerations. However, this drops to 29 percent among those aged 35–54 and just 25 percent among those 18–34.

H&R Block Canada also notes that more than half of Canadians (54 percent) are unsure whether their families have taken steps to minimize tax liabilities on inherited wealth. Only 37 percent feel confident in their understanding of tax implications.

Additionally, just 33 percent understand the tax impact of receiving gifted assets before versus after a loved one’s passing, even though the timing can significantly affect tax liabilities.

Lemay emphasized the importance of planning ahead: “Talking about inheritance-related matters is a sensitive topic. But it’s important to understand and forward plan around tax-friendly ways to pass money and assets on to loved ones.”

Strategies such as gifting before death, leveraging tax-free life insurance, maximizing Tax-Free Savings Accounts (TFSAs), and setting up trusts can help reduce tax burdens for beneficiaries.

H&R Block Canada outlines key areas where inheritance-related taxes may apply:

Capital gains tax

Upon death, the CRA treats most assets as if they were sold at fair market value. If an asset has appreciated in value, the deceased must pay taxes on the capital gain, unless the beneficiary is a surviving spouse or common-law partner.

Investment properties, stocks, registered savings plans, and business assets are subject to this tax.

For instance, if a deceased individual purchased a cottage for $300,000 and its value increased to $400,000 at the time of death, 50 percent of the $100,000 capital gain may be taxable.

Registered accounts tax

Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) are considered taxable income in the year of death unless transferred to a spouse, common-law partner, or a financially dependent child or grandchild. This could result in significant tax liabilities.

For example, an RRSP valued at $100,000 would be included in the deceased’s income for the year of death, with applicable income taxes incurred.

Provincial estate administration taxes

Some provinces impose estate administration taxes, also known as probate fees. Ontario, for example, charges approximately 1.5 percent on estates valued above $50,000.

A $500,000 estate would face a tax bill of about $6,750. However, assets with named beneficiaries, such as life insurance policies and RRSPs, may bypass these fees. Manitoba and Quebec do not impose probate fees.

International inheritance tax rules

With one in five Canadians born outside the country, many inherit assets from abroad. This requires consideration of both Canadian tax laws and the inheritance tax rules of the country where the assets originate.

The survey outlines several ways to minimize the tax impact of inheritance:

Principal residence exemption: A primary residence is exempt from capital gains tax upon the owner’s death. However, if the property was used for rental income, including short-term rentals, or was not the deceased’s primary home throughout ownership, a partial tax may apply.
Tax-Free Savings Accounts (TFSAs): If left to a spouse or common-law partner, a TFSA remains tax-free. If left to another beneficiary, the TFSA ceases, but the investment gains remain tax-free.
Life insurance payouts: Life insurance proceeds are not taxed for beneficiaries, except in cases where the beneficiary is a corporation rather than an individual. Life insurance is often used to cover capital gains tax on inherited assets like businesses or real estate, preventing heirs from needing to sell assets to pay taxes.
Cash, personal belongings, and non-registered investments: Inherited cash, bank accounts, jewelry, vehicles, and personal effects are generally exempt from tax for recipients.
Gifting assets before death: Gifting money or assets before death is typically tax-free, but tax implications depend on the asset type. H&R Block Canada recommends consulting a tax expert before making such decisions.
Gifting real estate, stocks, or investments before death: The CRA considers gifted assets as sold at fair market value, meaning the giver may owe capital gains tax if the asset increased in value. The recipient inherits the asset at the current market value and pays taxes when they sell it. However, a principal residence exemption may apply if the gifted property is a primary home.
Joint Ownership with Right of Survivorship: Adding a spouse or adult child as a joint owner on assets such as bank accounts, real estate, or investments allows those assets to bypass probate taxes and transfer directly to the surviving joint owner.
Living trusts: Alter Ego Trusts (for individuals 65+) and Joint Partner Trusts (for couples 65+) allow Canadians to transfer assets into a trust while retaining control during their lifetime. These trusts help avoid probate and reduce tax liabilities when assets pass to beneficiaries.