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
Taxation of Gifts and Bequests Gifts and testamentary gifts are not typically subject to taxation in Canada. However, an increase in the gift’s value or income earned by it may be taxable. Taxation of Estates Although Canada does not impose an estate or inher - itance tax, assets distributed through probate may be subject to estate administration taxes (also known as “probate fees”). Probate fees vary by province and territory. Manitoba and Quebec do not charge probate fees, although a filing fee may apply. In Ontario, estates valued at less than CAD50,000 are exempt from probate fees; in Brit - ish Columbia and the Yukon, the exemption applies to estates valued at less than CAD25,000. Generally, probate fees are based on the value of assets distrib - uted under the probated will. For example, in Ontario, probate fees are calculated at CAD15 per CAD1,000 for the value of the assets exceeding CAD50,000; in Alberta, the Northwest Territories and Nunavut, how - ever, probate fees are capped for estates valued at CAD250,000. Taxes are generally payable on income earned by the deceased up to the date of death, unless an exemp - tion applies. On death, assets are generally deemed to have been disposed of at fair market value, which may trigger capital gains tax. Tax applies to 50% or 100% of the capital gain, depending on the asset, and may be deferred depending on the beneficiary. 1.2 Exemptions Certain exemptions apply to estate assets. For exam - ple, the sale or transfer of real property typically results in a significant capital gain, but a principal residence exemption allows the transfer or sale of an individual’s principal residence without triggering a taxable capital gain. A capital gain tax will typically apply, however, to any additional residences owned by the deceased. A cumulative lifetime capital gains exemption also applies to the disposition of qualified property, such as small business corporation shares. Only half of the capital gain must be included in the deceased’s taxable income. As of 2026, the lifetime capital gains exemption is CAD1.25 million.
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, high-income earners may 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 considered individual taxpayers under the Income Tax Act, RSC 1985, c 1 (5th Supp), and income earned by trusts and estates is taxable. Currently, inter vivos and testamentary trusts that are resident in Canada are typically taxed at the highest marginal rate. Several types of trusts are exempted from paying the highest graduated tax rate, including: • graduated rate estates, which are taxed at marginal rates for 36 months following death, after which the highest marginal rate will apply; • qualified disability trusts, being testamentary trusts for which the beneficiary is eligible for the Cana - dian disability tax credit; and • subject to certain restrictions, grandfathered inter vivos trusts settled before 18 June 1971. Overview of Tax Credits and Deductions The Canada Revenue Agency (CRA) administers Can - ada’s tax system and recognises deductions and tax credits for expenses related to family and childcare, medical expenses, education, and saving for retire - ment. Tax deductions reduce taxable income, where - as tax credits reduce tax otherwise payable. Tax cred - its are generally non-refundable, meaning they do not create a tax refund independently. However, unused credits may sometimes be carried forward. Tax credits and deductions can significantly reduce income taxes payable.
141 CHAMBERS.COM
Powered by FlippingBook