Understanding the tax rules when inheriting from Canada while living abroad
For non-residents of Canada, receiving an inheritance from a Canadian estate can raise a host of questions, especially around tax obligations. If you’re a Canadian expat or a foreign heir, you might be wondering: Will I have to pay inheritance tax in Canada?
The short answer? Canada does not have an inheritance tax. But that doesn’t mean there are no tax implications. Instead of taxing the recipient, Canada taxes the estate before the inheritance is distributed.
Let’s break down exactly what that means for non-residents.
There’s No “Inheritance Tax” in Canada, But There Is Tax
Unlike the U.S. or some European countries, Canada does not impose an inheritance or estate tax on the beneficiary. That means, as a non-resident, you won’t be taxed just for receiving an inheritance.
However, the Canada Revenue Agency (CRA) does tax the estate of the deceased before assets are passed on. This is done through a system called “deemed disposition.”
What Is Deemed Disposition?
At the time of death, the CRA considers that the deceased has “sold” all their assets at fair market value, even though no actual sale has taken place. This deemed sale triggers:
- Capital gains tax on things like investments or second properties
- Income tax on registered accounts like RRSPs or RRIFs
The estate must settle these taxes before any inheritance is distributed, whether to residents or non-residents.
What If the Beneficiary Is a Non-Resident?
If you live outside Canada and are the beneficiary of a Canadian estate, here’s what you need to know:
You don’t pay inheritance tax
As mentioned, there is no direct tax on what you receive.
You may face withholding taxes
If you inherit Canadian income-producing assets (like rental property or dividend stocks), the executor of the estate must withhold 25% of the gross income before distributing it to you.
This is mandated under Section 212 of the Income Tax Act.
Inheriting Canadian Property as a Non-Resident
If you inherit Canadian real estate, the estate may need to obtain a Certificate of Compliance (Form T2062) to confirm taxes are paid before transferring the property or its proceeds. This certificate ensures no capital gains taxes are missed on the property’s appreciation.
Without this step, the estate could be held liable for unpaid taxes.
Tax Treaties May Reduce Withholding
Canada has tax treaties with many countries that can lower or eliminate withholding taxes on income from Canadian sources. For example, if you live in the U.K. or the U.S., your tax treaty might reduce the default 25% withholding rate on certain types of income.
You can review Canada’s tax treaties with other countries via this CRA resource.
What About Probate Fees?
Probate fees aren’t taxes, but they are estate administration costs. These vary by province and are typically calculated as a percentage of the estate’s total value. The estate pays these fees, not the non-resident beneficiary.
Canadian Expats: What You Should Know
If you’re a Canadian living abroad and planning your estate—or expecting an inheritance—it’s crucial to understand your tax obligations on both sides. You can find more information on staying compliant while living overseas in our guide:
Canadian Expats and Taxes: How to Stay Compliant While Living Abroad
Summary: Do Non-Residents Pay Inheritance Tax in Canada?
| Tax Item | Paid By | Applies to Non-Residents? |
|---|---|---|
| Inheritance Tax | ❌ None | ❌ No direct tax |
| Capital Gains & Income Tax | ✔️ Estate | ✔️ Yes, before distribution |
| Withholding on Canadian Income | ✔️ Executor | ✔️ Yes (25%, subject to treaty) |
| Probate Fees | ✔️ Estate | ❌ Not paid by beneficiary |
| Real Estate Clearance Certificate | ✔️ Executor | ✔️ Required for transfer/sale |
While non-residents do not pay a direct inheritance tax in Canada, the estate may incur taxes that affect what’s passed on to you. You may also face withholding taxes on income from Canadian assets after the inheritance.
To avoid surprises, it’s best to consult a cross-border tax expert and ensure the estate executor understands the required filings and clearance certificates.
Need help navigating these rules or planning ahead? The team at Accounting Montreal specializes in helping Canadian expats and non-residents stay compliant. Get in touch today for professional guidance.
Have more questions about cross-border taxation, estate planning, or inheritance rules in Canada? We’re here to help. Book a consultation or browse our other resources at Accounting Montreal.
