Canada inheritance tax laws

[shalab]

I am curious how our Canadian board members plan to handle this, I know many are young to think about death but still... Seems to me that it is better to become a resident of Florida than die in Canada if one likes ones immediate family. It is also not clear what happens to real estate from this bulletin

 

https://turbotax.intuit.ca/tips/canada-inheritance-tax-laws-information-463

 

...

 

Non-registered capital assets are considered to have been sold for fair market value immediately prior to death. Any resulting capital gains are 50% taxable and added to all other income of the deceased on their final return where income tax will be calculated at the applicable personal income tax rates. They are taxed at the applicable capital gains tax rates.

 

The fair market value of a Registered Retirement Savings Plan (RRSP) or a Registered Retirement Income Fund (RRIF) is included in the deceased person’s income and taxed at the regular applicable personal income tax rates with no  special treatment for any capital gains earned within the RRSP or RRIF.

 

...

 

[rb]

It's actually pretty simple. You get taxed exactly as if you would have liquidated your assets right before you died. All the regular taxation applies, tax is paid by the estate. So no tax on principal residence. All other real estate is a capital asset and it's deemed sold and capital gains taxes have to be paid. All RRSPs are cashed in.

 

Since Canada has a progressive tax system it's not advisable to die with large real estate holdings or large RRSPs.

 

The Florida resident thing is neither practical nor advisable. Firstly, you can't just become a resident of Florida. The US won't let you do it. Secondly, if you could, by becoming a resident of Florida you loose your Canadian health care coverage. In the years before your death you'll consume a lot of healthcare. With health care costs in the US being sky high they will more negate whatever tax benefits you get. Of course if you're one of the ultra rich the calculation is a but different, but then why would you move to Florida  ???

[shalab]

...

 

Since Canada has a progressive tax system it's not advisable to die with large real estate holdings or large RRSPs.

 

The Florida resident thing is neither practical nor advisable. Firstly, you can't just become a resident of Florida.

 

...

Of course if you're one of the ultra rich the calculation is a but different, but then why would you move to Florida  ???

 

Looks like the primary residence is not taxed if the heirs continue to live there.

 

Otherwise, well said. I am sure Prem Watsa won't give 50% of his share of FRFHF to the government. I think he has placed his voting shares in a trust or something?

 

Even if one is not ultra wealthy - giving away 50% of ones wealth to the government is steep. I know many people love the Canadian govt but don't think they love it that much.

 

One can become a USA green card holder/citizen through investment and avail oneself of medicare. Florida or California has better weather and lower taxes.

 

[bizaro86]

Nobody is giving 50% of assets to the Canadian government. The 50% refers to the fact that 50% of capital gains are included for tax, and then taxed at around 50% for the highest brackets.

 

So on death an estate in the highest bracket will pay 22-27% on the APPRECIATION of the assets, cost basis isn't taxed at all. Neither is personal residence, and there is an exemption for the first chunk of a private business (600k? Or so, not sure on that)

 

https://www.bdo.ca/en-ca/insights/tax/tax-facts/top-marginal-tax-rates-2018/

 

[EliG]

Canadians who become non-residents for tax purposes are subject to "departure tax". Your non-registered investments are deemed to be sold at fair market value. You have to pay tax on the capital gain, even if you don't sell anything. This is similar to estate tax. RRSPs get a tax break compared to estate tax. The "departure tax" on the collapsed RRSP is a flat 25%.

 

[rb]

 

One can become a USA green card holder/citizen through investment and avail oneself of medicare. Florida or California has better weather and lower taxes.

The investment visa involves a decent size investment - half a mil or a mil I believe and it has to be an active business creating X number of new jobs. So you have to actually start a business and deal with employees and stuff. 75 year olds are not really into that.

 

Also, incorrect on medicare. It's not enough to be a resident to be covered by medicare. You have to have paid into the fund. I'm not sure if 20 years is the threshold but it's a fairly long time. So again, becoming a Florida resident is not an answer.

[rb]

Canadians who become non-residents for tax purposes are subject to "departure tax". Your non-registered investments are deemed to be sold at fair market value. You have to pay tax on the capital gain, even if you don't sell anything. This is similar to estate tax. RRSPs get a tax break compared to estate tax. The "departure tax" on the collapsed RRSP is a flat 25%.

There is actually no departure tax for RRSPs and RRSPs ad RRIFs do not get collapsed when you leave the country. There is a Canadian withholding tax when you withdraw money from the plans. It's a flat 25% if you withdraw from RRSP. If the RRSPs get converted to RRIF then the withholding rates are dictated by tax treaties with the respective countries you live in. Of the top of my head it's 0% for the US, 15% for most treaty countries (there are some exceptions), and 25% for non-treaty counties.

[EliG]

Canadians who become non-residents for tax purposes are subject to "departure tax". Your non-registered investments are deemed to be sold at fair market value. You have to pay tax on the capital gain, even if you don't sell anything. This is similar to estate tax. RRSPs get a tax break compared to estate tax. The "departure tax" on the collapsed RRSP is a flat 25%.

There is actually no departure tax for RRSPs and RRSPs ad RRIFs do not get collapsed when you leave the country. There is a Canadian withholding tax when you withdraw money from the plans. It's a flat 25% if you withdraw from RRSP. If the RRSPs get converted to RRIF then the withholding rates are dictated by tax treaties with the respective countries you live in. Of the top of my head it's 0% for the US, 15% for most treaty countries (there are some exceptions), and 25% for non-treaty counties.

 

I stand corrected. I knew 25% RRSP rate but was murky on the details.

 

RRIF withdrawal rate for the US is 15% per Appendix 2 here:

 

https://ca.rbcwealthmanagement.com/delegate/services/file/658828/content

 

[rb]

 

RRIF withdrawal rate for the US is 15% per Appendix 2 here:

 

https://ca.rbcwealthmanagement.com/delegate/services/file/658828/content

You are correct Eli. For RRIFs and other pensions it's 15% for the US. It's 0% for the UK. My apologies for the error, I have a few clients in the UK.

[Cigarbutt]

shalab,

I don't have specific statistics and have less info about Western Canada but Canadian retirees definitely moving to the US is a very rare occurence unless one has  very specific reasons or is very rich because (already well described) of the punitive effects on wealth upon departure and because of the loss of health coverage at a point in one's life when one most needs it.

 

Because of the climate though, what is very popular is the Snowbird phenomenon:

http://www.snowbirds.org/

 

Before you suggest that Canadians are taking advantage of you, please remember that the temporary migrants tend to be wealthy and tend to spend a lot, contributing to your GDP :).

 

The last time I checked, something like 500 000 Canadians owned real estate in the State of Florida, mainly for that purpose (avoid cold winters). Two other popular States are California and Arizona. There are very stringent rules that people need to follow, otherwise significant penalties can occur.

 

 

@bizaro86

 

I seem to remember that you own a business. Here's a relevant link for the lifetime capital gains exemption for "qualified" small businesses.

https://www.taxtips.ca/smallbusiness/capitalgainsdeduction.htm

If you have children, I suggest that you look into "an estate freeze" to delay a part of the capital gains in the hands of the members of the generation that will survive you.

 

[matts]

I think the real conclusion of all the above posts is that if you really want to avoid a tax hit when you die, it's best to leave a high tax jurisdiction BEFORE you get that wealthy. Leave now with your small to moderate wealth, takes the departure tax hit, and build your wealth via a company incorporated in a zero tax country while being a tax resident in a territorial tax regime country. Beyond that, you will have a difficult time dodging taxes as western governments are not that stupid, they have closed most of the loopholes in the last couple decades.

 

 

[cwericb]

Shalab. This seems pretty simple, but here is my understanding having dealt with the situation a couple of times:

 

1) In Canada, there is no inheritance tax

 

2) In Canada gain on a principal residence is tax free. There is zero tax on the deceased's principal residence. 

 

3) The estate is treated as though all the deceased's assets were sold on the day of the death.

 

4) Capital gain on investments is crystalized at the time of death.

 

5) In Canada only 50% of a capital gain is taxable and the other 50% of the gain is tax free

 

6) The capital gain is then added to the deceased total income for that year and is taxed accordingly.

[StubbleJumper]

I'd say that the premise of this thread is flawed.  Changing jurisdictions to avoid tax tends to be very expensive.  If you have enough money that death/inheritance taxes have become a real issue, then you have enough money to live wherever the hell you want.  Just go live where you want to live and let the next generation worry about generating its own wealth.  If you have reared your children well, whatever estate you leave them should just be gravy rather than a critical component of their financial well-being.

 

 

SJ

[Cardboard]

I agree SJ.

 

Moreover since you can't take it with you, planning to give your money to charities of your choice through your will does provide a deduction to the estate on tax payable at death.

 

Cardboard

[bizaro86]

@cigarbutt thanks! My kids are still very young, and I doubt either of them will be interested in taking over. If they are, I'll do it at then, as I still have room under the limit. The limit is really X2 for a couple that owns a business 50/50, which is how mine is set up.

[shalab]

Hi guys - thanks for all the replies. My interest in Canadian PR has declined after looking at the death taxes. If a person has a networth of > 500K outside the main residence, don't think it helps to move to Canada from the US.

 

Interestingly, Prem Watsa has moved all his FRFHF holdings into companies and will escape the death tax. From wikipedia:

Prem Watsa has served as chairman and chief executive officer of Fairfax Financial Holdings Limited (formerly Markel Financial Holdings) since 1985 and as vice president of Hamblin Watsa Investment Counsel since 1985. Mr. Watsa, directly, and indirectly through 1109519 Ontario Limited, The Sixty Two Investment Company Limited and 810679 Ontario Ltd., owns the controlling equity voting interest of Fairfax Financial Holdings Limited("Fairfax").[6] He owns roughly 10% of Fairfax, which accounts for 99% of his personal wealth. His 10-for-1 multiple voting shares give him just over 50% ownership.

[rb]

How exactly did Prem avoid taxes, your little blurb does not exactly say, and from what I read he didn't avoid shit.

[matts]

If you are already considering moving from the US and assuming you are not a US citizen, then like I said, the best structure for you is a corp in a low/zero tax jurisdiction while you live as a tax resident in a territorial tax system country. There are quite a few of them, google for a list. Your corp will earn tax free, and you will be able to get salary/dividends tax free paid to you personally because the income was generated outside your resident country.

 

 

 

 

[cwericb]

"My interest in Canadian PR has declined after looking at the death taxes"

 

???? Death taxes are zero in Canada.

[bizaro86]

Hi guys - thanks for all the replies. My interest in Canadian PR has declined after looking at the death taxes. If a person has a networth of > 500K outside the main residence, don't think it helps to move to Canada from the US.

 

Interestingly, Prem Watsa has moved all his FRFHF holdings into companies and will escape the death tax. From wikipedia:

Prem Watsa has served as chairman and chief executive officer of Fairfax Financial Holdings Limited (formerly Markel Financial Holdings) since 1985 and as vice president of Hamblin Watsa Investment Counsel since 1985. Mr. Watsa, directly, and indirectly through 1109519 Ontario Limited, The Sixty Two Investment Company Limited and 810679 Ontario Ltd., owns the controlling equity voting interest of Fairfax Financial Holdings Limited("Fairfax").[6] He owns roughly 10% of Fairfax, which accounts for 99% of his personal wealth. His 10-for-1 multiple voting shares give him just over 50% ownership.

[/quote

 

Nope. He would have a deemed disposition of his personal holding companies, which would be a taxable event.

 

Also, they aren't death taxes, they are capital gains taxes.