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If you have assets in Canada (mostly registered and non registered investments) but are a tax resident in another country with which Canada has a tax agreement, what happens to those assets when you die? Do they fall under Canadian inheritance laws (tax free) or under the other country's inheritance law (taxed)?
Dear Michèle,
Thank you for your thoughtful question regarding the taxation of Canadian assets upon death when you are a non-resident of Canada.
Below is a detailed explanation of how Canadian and foreign tax rules may apply:
1. No Inheritance Tax in Canada
Canada does not have an inheritance tax. Instead, Canada treats death as a deemed disposition of your assets at fair market value (FMV) immediately before death. This means:
- Capital gains on non-registered investments (stocks, mutual funds, etc.) are taxed in Canada on your final return
- Registered accounts such as RRSPs or RRIFs are fully taxable as income on your final Canadian tax return, unless they are rolled over to a spouse or financially dependent child
This final return is known as a "terminal return", and it is filed by the executor of your estate.
2. Tax Treaties and Residency of the Deceased
Since you are a tax resident of another country that has a tax treaty with Canada, the treaty will usually allocate taxing rights on death-related income as follows:
- Canada has first right to tax Canadian-situated assets
- Your country of residence may also impose tax on the same amounts
- If double taxation arises, you may be eligible for a foreign tax credit in your country of residence to offset the Canadian tax paid
So while Canada taxes capital gains and income at death, your inheritance laws (and any estate/inheritance tax) are governed by the laws of your country of residence, not Canada.
3. Example: U.S. or EU Country
- If you are a U.S. tax resident, you may be subject to U.S. estate tax rules in addition to Canadian tax on deemed disposition
- If you are in an EU country, such as France, Italy, or Germany, local inheritance taxes may apply to the value of the estate received, but this depends on bilateral treaty provisions
4. Probate and Legal Requirements
- Even as a non-resident, your executor may need to probate your Canadian will or obtain court certification in the province where your assets are held
- Some financial institutions may withhold disbursement of funds until Canadian tax clearance is obtained