In Canada, the transfer of an estate from a deceased person to a beneficiary is legally treated as a sale between the two parties. The amount of the estate that is taxed is thus based on the capital gain or loss associated with the transaction, minus certain eligible deductions and exemptions. Half of the capital gains associated with the transaction are taxed at the same rate as individual income.
Definition of Taxable Estate
Any property inherited in Canada is taxed as if that property was sold in a transaction. The amount deemed taxable depends on the capital gain or capital loss associated with the property. If the property is worth more than the amount initially paid for it, then the sale of that property is deemed a capital gain. If the property is worth less than the amount initially paid for it, then the sale of that property is deemed a capital loss. The total amount of estate considered taxable under Canadian law is one-half of the net capital gain associated with the sale of the estate from the deceased to the beneficiary.
Property Eligible for Taxation
Only certain property is considered when calculating the net capital gain or loss associated with the decedent's estate. Categories of eligible property includes stocks, bonds, mutual funds and small business corporation shares; real estate, depreciable property, farm property,and fishing property; bonds and promissory notes; mortgage foreclosures and property repossessions; and personal-use property.
If the estate includes small business corporation shares, farming property, fishing property or income derived from those entities you may deduct a portion of that income from the overall capital gains that are eligible for taxation. The maximum deduction allowable is $375,000 as of August, 2010.
Exemption for Terminal Loss
If, in the year of death, the estate suffered a net depreciation of value then a percentage of the terminal loss may be applied as a deduction to the total amount of the taxable capital gains. These recaptures are typically a result of depreciation of value of personal property; however, they can not be applied to depreciation of personal-use items such as vehicles. For more information, see the Canada Revenue Agency IT-478R2 bulletin.
Calculating Capital Gain or Loss
Capital gain or loss is calculated based on the initial (or base) cost of the decedent's assets, the value of the assets at time of death and all eligible deductions and exemptions. As of August, 2010, you are required to calculate the net capital gain or loss using Canada Revenue Agency form TI-2009. For more information on capital gains, see the Canada Revenue Agency's guide to capital gains.
Since the estate transfer is treated as a capital gain, tax rates on estates are the same as tax rates on individual income. These rates vary based on the province of residence.