Freeing up wealth for the next generation is a common goal for many clients. As a financial advisor, you might be asked about the tax implications of passing on assets. Inheritance tax is a term that comes up frequently, but there can be a lot of confusion about how it works.
In this article, Wealth Professional Canada will clarify what inheritance tax means and how you can help your clients plan for a smooth transfer of wealth. We will also cover strategies to avoid taxes and more.
Inheritance tax is a tax that some countries impose on people who receive assets from a deceased person’s estate. The tax is paid by the person who receives the assets, and the rate often depends on the relationship to the deceased and the size of the inheritance.
This type of tax is designed to collect revenue from the transfer of wealth between generations. The rules and rates vary widely between countries and even between states or provinces.
As of this writing, Canada does not have an inheritance tax. Your clients will not pay tax simply because they inherit money, property, or investments from a family member. However, this does not mean that there are no tax implications when someone passes away.
Instead of taxing the recipient, the focus is on the estate itself. When a person dies, their estate is responsible for settling any outstanding taxes before assets are distributed to beneficiaries.
The main tax event is called a deemed disposition. This means that, for tax purposes, the government treats the deceased’s assets as if they were sold at fair market value on the date of death.
The executor must file a final tax return, also known as a terminal return. It includes any capital gains or losses on these assets, as well as any other income earned up to the date of death.
To learn more about inheritance taxes, watch this:
If there are taxes owing, they must be paid by the estate before any assets are passed on. Only after the Canada Revenue Agency (CRA) is satisfied that all tax obligations are met can the executor distribute the remaining assets to the beneficiaries.
To confirm this, the executor should request a clearance certificate from the CRA. This certificate protects the executor from being held personally liable if it turns out more tax is owed later.
Explain to your clients that while they will not pay tax on what they inherit, the estate might face tax bills that reduce the amount available for distribution.
Generally, your clients do not have to report inheritance money as income on their tax returns. There is no requirement to declare inherited cash, property, or investments to the CRA. Reassure your clients that they will not pay tax just for receiving an inheritance.
Since Canada does not have an inheritance tax, your clients do not need to worry about paying tax on what they receive from an estate. However, there are still taxes and fees that can impact the value of an inheritance.
Here are some strategies to help your clients minimize these costs and make the process easier for their families:
Encourage your clients to name beneficiaries on their registered accounts such as:
When a beneficiary is named, these assets usually bypass the probate process and are paid directly to the beneficiary. This can help avoid probate fees and speed up distribution.
Assets held in joint ownership, such as property or bank accounts, generally pass directly to the surviving co-owner if they include the right of survivorship. This means the asset does not go through probate and is not included in the calculation of probate fees.
This can be a simple way to transfer assets to a spouse or family member.
A life insurance policy can provide your clients’ families with the cash they need to pay taxes or other expenses after death. The payout from a life insurance policy is tax-free and can help prevent the need to sell important assets, such as a family cottage or investments, just to cover the tax bill.
A 2025 study found that life insurance can provide clients with a financial safeguard and peace of mind.
One way to reduce probate fees is to shrink the size of your clients’ estates before death. Your clients can do this by gifting money or real estate directly to family members while they are still alive. This strategy can help reduce the value of the estate that is subject to probate fees.
Canada does not have a gift tax. Your clients can give any amount of money to family members without triggering a tax bill. There are no limits on the size of gifts, and your clients do not have to report gifts to the CRA.
This makes gifting an effective way to transfer wealth and reduce the size of an estate before death. However, there are a few points that financial advisors should keep in mind:
Gifting can be a useful strategy for reducing probate fees and simplifying the transfer of wealth. Still, it is critical to consider the tax implications of gifting appreciated assets.
Capital gains tax is a reality for many Canadians, but there are legal ways to help your clients reduce the amount they owe. Avoiding income tax entirely is not just difficult—it’s illegal. Still, there are several strategies your clients can use to limit capital gains tax and keep more of their investment profits.
The CRA collects taxes on the profit made from investments. There isn’t a set capital gains tax rate. Instead, a portion of your clients’ capital gains is included in their total income and taxed at their marginal rate.
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For 2024 and 2025, the capital gains inclusion rate stays at 50 percent for all asset sales. The planned rise to about 67 percent for individual gains over $250,000, and for all gains by corporations and most trusts, are deferred to January 1, 2026.
As mentioned above, registered accounts can all shelter investments from immediate tax. Gains inside an RRSP are taxed only when withdrawn, usually at a lower rate in retirement.
TFSAs allow tax-free withdrawals while Registered Education Savings Plans (RESPs) let children withdraw funds at usually low tax rates.
If your clients have investment losses, these can offset gains in the same year. Losses can also be carried forward indefinitely or back three years to reduce taxable gains. Just make sure that the losses are genuine as superficial loss rules prevent quick repurchases.
The principal residence exemption means that your clients don’t pay capital gains tax on their main home. This can also apply to a cottage or vacation home under some conditions.
When you apply these strategies, you can help your clients manage their tax burden and keep more of their investment returns.
Inheritance tax is not something your clients need to worry about. The real focus should be on the taxes and fees that apply to the estate before assets are passed on. Encourage your clients to keep thorough records of their assets and to update their estate plans as their circumstances change.
Remind them that naming beneficiaries on registered accounts or considering joint ownership can make the process easier for their families. Suggesting life insurance as a way to cover potential tax bills can also help protect important assets from being sold under pressure.
Most importantly, urge your clients to work with qualified estate and tax professionals. Every situation is different, and expert advice can help make sure their plans are both effective and up to date. With the right support, your clients can pass on their wealth smoothly, knowing that they have taken the necessary steps for their families’ future.
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