Ontario residents may be interested in an explanation of the tax implications for different types of inherited assets. Either the estate of the owner of the assets or the beneficiary may face taxes depending on the type of inheritance and the instructions to the executor. In some cases, a decedent's taxes will be paid by the estate, provided that the executor of the estate was directed to do so. The beneficiary would then inherit these funds as taxpaid money, and no tax would be owed.
When someone inherits a Registered Retirement Income Fund, the tax on the fund has been deferred. Therefore, this income is included on the final tax return of the owner after he or she passes away. Although there is tax owed, the bank holding the RRIF will send the entire amount to the executor, who must then pay the taxes. Capital gains on stocks and non-residential property must also be reported.
Other types of assets are treated differently, however. For instance, no taxes are owed up to the day of the owner's death on a Tax-Free Savings Account. However, any capital gains earned on that money after the person's death is taxable. The same goes for investment income from other money in the estate earned after the person's death. This tax may be paid out of the estate's assets, or else the beneficiary must report the income.
Understanding the various tax implications during the estate planning process can be difficult. A lawyer with experience in this area may be able to help a person to determine the best estate planning methods to minimize taxes during the distribution of assets after his or her death.
Source: The Star Phoenix, "The ins and outs of understanding inheritance taxes", Terry McBride, August 05, 2014