Inheritance Tax Treatment

JUN 7, 2017

By: Evelyn Suvajdzic

This excerpt is taken from my monthly tax webinar with Tax Mentor

CRA was asked whether there is a particular provision in the Tax Act that explicitly states that inheritances are not taxable. In response, CRA states that most gifts and inheritances are not subject to tax in the hands of the recipient. This, however, does not mean that there are no tax consequences in respect of gifts and inheritances, just generally not for the recipient.

It is often the person making the gift that is subject to taxation. The recipient often receives the gift "tax-paid". If the gift is an inter vivos gift, the transferor is deemed to have disposed of the gift at fair market value and would be subject to taxation. If the gift is from an estate, tax would have been paid by the deceased on the deemed disposition that occurs at death. However, if there is income earned in an estate and the income is paid to a beneficiary, that beneficiary may be subject to taxation on that "inheritance".

While a recipient is generally not subject to taxation on a gift or inheritance, a recipient may nevertheless incur a tax liability in respect of the gift. The Tax Act has certain provisions where gains, and hence the tax liability, can be deferred and transferred to the recipient. The most common instances of these deferrals are transfers that are made to one's spouse, and the transfer of certain properties (farming and fishing) to children. Hence, there is a tax liability associated with a gift or inheritance to a recipient, though the liability may not be realized until a later time. 

If the transferor of the gift is unable to pay the tax liability, it may be that the recipient of the gift will be jointly and severally liable for the tax if the recipient and the transferor are not dealing at arm's length. While this technically is the tax liability of the transferor, the recipient may have to pay this tax as a result of receiving the inheritance.

Besides income tax, there are other taxes that may arise on gifts and inheritances, such as probate and land/property transfer tax.

It should be noted that not all gifts are tax free for the recipient. It depends on the context in which the gift is made. In a situation where an employer gifts money or property to an employee, it is likely that such a gift will be taxable in the hands of the recipient.