Tax Implications of Inheritance in BC

No inheritance tax — but there IS tax at death

Canada eliminated its estate tax in 1972. There is no tax on the act of inheriting. When your grandmother leaves you $100,000, you don't owe tax on that $100,000.

But here's what does happen: when someone dies, CRA treats them as if they sold everything they own at fair market value immediately before death. This is called a deemed disposition. Any gains are taxed on the deceased's final income tax return — paid by the estate, not the beneficiary.

What gets taxed at death

RRSPs and RRIFs

The full value of the RRSP or RRIF is included as income on the deceased's final tax return. On a $300,000 RRSP, the tax can be $100,000+ depending on other income.

Exception: If the RRSP/RRIF is left to a spouse (or common-law partner), it can be rolled over to their RRSP tax-free. This is the most important tax planning opportunity at death.

For more: RRSP & TFSA Beneficiary Designations

Capital gains on investments

Stocks, mutual funds, ETFs, and other investments are deemed sold at fair market value. The capital gain (the increase in value since purchase) is taxable. In Canada, 50% of capital gains are included in income (for the first $250,000 of gains; amounts above that may be included at a higher rate under current rules).

Real estate (non-principal residence)

Rental properties, vacation homes, and investment real estate are subject to capital gains tax on the deemed disposition. If a cottage purchased for $200,000 is worth $500,000 at death, there's a $300,000 capital gain — with $150,000+ included in income.

Principal residence

The principal residence exemption still applies at death. Your home — if it qualifies as your principal residence — is exempt from capital gains tax. This is often the largest asset in the estate and the largest tax exemption.

TFSAs

TFSAs are generally not taxable at death. If your spouse is named as successor holder, they take over the TFSA with no tax consequences. If a beneficiary is named, they receive the value tax-free (though growth after death may be taxable).

The final tax return

The executor must file the deceased's final income tax return (called the "terminal return"). This includes:

• All income earned from January 1 to the date of death
• The deemed disposition of all capital property
• The full value of RRSPs/RRIFs (unless rolled to spouse)
• Any other income (pension, employment, rental, etc.)

Due date: April 30 of the year after death, or 6 months after the date of death — whichever is later.

CRA clearance certificate

Before distributing assets to beneficiaries, the executor should obtain a clearance certificate from CRA. This confirms that all taxes have been paid and CRA has no further claims against the estate.

Without a clearance certificate, if CRA later assesses additional tax, the executor can be personally liable for the amount distributed to beneficiaries.

Tax planning strategies

Several strategies can reduce the tax burden at death:

• Spousal rollover: Assets transferred to a spouse (including common-law) can be rolled over at cost, deferring capital gains and RRSP tax until the surviving spouse's death
• Charitable donations: Donations made by the estate (or in the will) can generate tax credits that offset the final tax bill. Donations of appreciated securities directly to charity avoid capital gains entirely.
• RRSP beneficiary planning: Name your spouse as RRSP beneficiary for the rollover. Name children as beneficiaries only if you've planned for the tax impact on the estate.
• Principal residence designation: If you own multiple properties, ensure the most valuable one is designated as the principal residence.
• Lifetime Capital Gains Exemption: Qualifying small business shares and farm/fishing property may be eligible for up to ~$1 million in tax-free capital gains.

What beneficiaries should know

• You don't pay tax on your inheritance
• The estate pays the tax before distribution — so your share may be less than expected
• If you inherit property, your cost base is the fair market value at the date of death (not what the deceased originally paid)
• If the estate doesn't have enough to pay the tax, the executor may need to sell assets — or CRA may pursue beneficiaries in some cases
• Income earned by inherited assets after you receive them is your income and taxable in your hands