CANADA Law and Practice Contributed by: Ian Hull, Suzana Popovic-Montag and Nick Esterbauer, Hull & Hull LLP
1. Tax 1.1 Tax Regimes Income Tax
create a tax refund independently – and income tax must be paid during the relevant year in order to effec - tively claim the credits (subject to any carry-forward allowances by the CRA). Tax credits and deductions can significantly impact the quantum of income taxes that are ultimately payable by a Canadian. Taxation of Gifts and Bequests Gifts and testamentary gifts are not typically subject to taxation in Canada. However, if either type of gift increases in value or earns income, the increase in value or income earned may be taxable in some cir - cumstances. Taxation of Estates Even though there is no Canadian estate or inherit - ance tax, assets that are distributed in accordance with a testamentary instrument submitted for probate may be subject to estate administration taxes (also known as “probate fees”). The applicable probate fees vary by province and territory. Manitoba and Quebec do not charge pro - bate fees, although there may be a filing fee to obtain probate. In Ontario, small estates valued at less than CAD50,000 are exempt from probate fees; estates val - ued at less than CAD25,000 in British Columbia and the Yukon are also exempt. Elsewhere, probate fees must be paid whenever a will is admitted to probate. Generally, the probate fees payable correlate with the value of assets distributed under the probated will. For example, in Ontario, probate fees are calculated at a rate of CAD15 per CAD1,000 for the value of the assets exceeding CAD50,000. In Alberta, the North - west Territories and Nunavut, however, probate fees are capped for estates valued at CAD250,000. Taxes must also normally be paid on the income earned by the deceased up to the date of death, unless an exemption applies. On the date of death, assets will generally be deemed to have been disposed of by the deceased at fair market value. The deemed disposi - tion of certain assets may trigger a capital gains tax. This tax is calculated on 50% or 100% of the value of a capital gain – depending on whether or not the affected asset is in a registered account – and may vary or be deferred depending on to whom the asset is bequeathed. A proposed increase to the capital gains
All income earned by Canadians is subject to taxation federally and provincially. Federal tax rates increase with income levels, ranging from 15% to 33% of gross income. Depending on the province, it is not unusual for high-income earners to pay tax approaching 50% of their income. Most forms of income splitting (a mechanism used to limit the taxes payable by families) have been elimi - nated by the federal government. Taxation of Trusts Trusts and estates are both treated as individual tax - payers under Canada’s income tax legislation, the Income Tax Act, RSC 1985, c 1 (5th Supp). Accord - ingly, income earned by a trust or estate is taxable. Currently, both inter vivos and testamentary trusts that are resident in Canada are typically taxed at the high - est marginal rate. Exemptions may apply to prevent trusts from being taxed at the highest graduated tax rate, including: • graduated rate estates, which are taxed at marginal rates for a period of 36 months following death (fol - lowing which they will be exposed to the highest marginal rate); • qualified disability trusts, being testamentary trusts for which the beneficiary or beneficiaries are eligi - ble for the Canadian disability tax credit; and • subject to certain restrictions, grandfathered inter vivos trusts (those that were settled before 18 June 1971). Overview of Tax Credits and Deductions The Canada Revenue Agency (CRA) is the body that oversees the taxation of Canadians, and recog - nises deductions and tax credits for various types of expenses related to family and childcare, medi - cal expenses, education, and saving for retirement. Tax deductions have the effect of reducing taxable income, whereas tax credits are deductions from the tax that is otherwise owing. For the most part, tax credits are non-refundable – meaning that they do not
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