No, Canada does not have a specific tax that is levied against beneficiaries inheriting under an estate.
So if there is no death tax, why is there so much talk about planning ahead to pay for taxes in an estate?
There are plenty of tax consequences when a person passes away, even if there is no specific tax on dying. This is because a person's assets are deemed by law to have been disposed of by the deceased one minute before he or she died.
For example, everyone who owns an RRSP knows that we do not pay tax on the money we put into our RRSPs until we take it back out. In other words, the money is not tax-free, it is tax-deferred. Every time we take out a portion of the funds, we pay the tax on that portion. So if you were to dispose of your entire estate one minute before you died, and as part of that you took all of the money out of your RRSP (or RRIF), then you would have to pay the taxes on it.
In practice, your estate would pay those taxes, even though the person named as the beneficiary of your RRSP or RRIF is not your estate. You can avoid paying those taxes if the beneficiary you designate is your spouse or a disabled child.
Another tax liability that arises when a person passes away is capital gains tax. This is a tax on capital property (some examples of which are real estate and shares in private corporations) that has increased in value since the day you acquired it.
For example, if you bought a cabin at the lake for $50,000 years ago, and by the time you die the cabin is worth $90,000, then the value of your property has gained $40,000. Half of that gain is taxable. Your executor would then have to include $20,000 (half of the gain) on your last tax return as income.
This tax is also payable out of your estate.
There is an exception to this rule as well. Your estate does not have to pay any capital gains tax on your residence. This is referred to as a capital gains exemption. If you have a home and a cabin, or a home and a rental property, you can claim the exemption only on one property, that being your usual place of residence.
There are some tools that can be used to address tax liability, such as life insurance policies, beneficiary designations, trusts and restructuring of the ownership of assets, depending on your situation.
For this reason, it's worthwhile to sit down with an experienced estate planning lawyer to make sure that you're aware of all of the possible tax consequences of your death and that of your spouse.,You also want to make sure you're aware of ways to reduce taxes and to have cash flow to pay the portion that can't be reduced.