Canadian families are more global than ever and this trend will only continue. Children and other family members increasingly work in other countries, sometimes staying after post-secondary education at a foreign college or university, forming relationships, including marriage, having children, and settling in their new home jurisdiction. Others emigrate to Canada, leaving relatives and friends in their country of origin.
Foreign jurisdictions, however, usually have very different tax regimes for taxing on death than Canada. We are unique among the few countries with a capital gains regime, which has been in place since January 1, 1972, when succession duties were abolished at the federal level and replaced by taxation of capital gains on death. On death, there is a “deemed disposition” of capital property at fair market value. The estate of the deceased person pays income tax on any capital gains, subject to certain exceptions and exemptions.
Estate Tax and Inheritance Tax Compared
Most high-tax jurisdictions have an estate or inheritance tax. An estate tax taxes the value of assets owned at death and is paid from the estate. An inheritance tax is paid by the beneficiary on the value of what they inherit.
Most Canadians would not be familiar with these tax regimes, in particular inheritance taxes, how different they are, and the impact they can have on their estate planning if they have foreign beneficiaries.
Countries with Inheritance Tax
A few examples of death taxes in several jurisdictions will illustrate the issues. Most EU countries have an inheritance tax where the beneficiary who receives the inheritance pays the tax.
- In Ireland, if a beneficiary is subject to Capital Acquisitions Tax, they pay 33% tax on their inheritance for amounts exceeding tax-free thresholds, which vary depending on the relationship of the deceased to the beneficiary.
- In France, inheritance tax (droits de succession) ranges from 1% to 60%, depending on the relationship to the deceased and the amount inherited, and there are progressive rates that apply after specified tax-free allowances.
For example, a child has a 100,000-euro allowance after which progressive tax rates of 5% to 45% apply. For nephews and nieces, there is a 7,967- euro allowance, after which 45% tax applies. For unrelated beneficiaries, there is a 1,594-euro allowance after which 60% tax applies, making France along with Belgium (up to 80%), Spain (up to 87.6%), and Germany (up to 50%) the highest inheritance tax countries. - However, a few countries do not have an inheritance tax, including Austria, Cyprus, Czech Republic, Estonia, Latvia, Malta, Norway (non-EU), Romania, Slovakia, and Sweden.
Countries with Estate Tax
Many countries have an estate tax, which taxes assets owned at death. For example, the United States has an estate tax at the federal level, as do several states, and some states have an additional inheritance tax. At the federal level, there is an exemption of $15M USD, so few estates pay any tax.
The United Kingdom also has an estate tax [although it is called inheritance tax (“IHT”)]. IHT is charged at 40% on the value of an estate above the nil-rate band, which is currently 325,000 Sterling, subject to certain exemptions and reliefs.
Impact on Estate Planning
It is important in planning the gifts under your will to understand how a foreign beneficiary may be taxed. For example, a cash gift of $250,000 to a friend who resides in France and is subject to French inheritance tax might be taxed at approximately 60%.
Or if you have children living in a jurisdiction that has an inheritance tax, although there may be a larger exemption than applies to a non-relative, it may be insignificant when compared to the size of the overall gift.
It is important to seek advice in each jurisdiction regarding any tax minimization strategies that may be available and to have a clear understanding of how the foreign beneficiary will be taxed.
Who Pays the Inheritance Tax?
Another consideration is that most Canadian wills contain a “debts and death taxes” provision that provides for all death taxes to be paid by the estate, so the beneficiaries receive the same amount notwithstanding local taxation. In particular, where a beneficiary may pay inheritance tax at a high rate, this may produce an unintended result and give rise to disgruntled beneficiaries who are not subject to inheritance tax indirectly bearing a portion of their sibling’s foreign inheritance tax.
As an example, if a child lives in Ireland or France or another country with an inheritance tax and your other children live in Canada, which has no inheritance tax, should your estate bear the burden of the inheritance tax or should your child? You should, of course, get advice from an Irish or French estate lawyer on this issue in planning your will.
Disharmony—and Possible Double Taxation
There is much disharmony when planning an estate that has foreign beneficiaries. No doubt, with globalization comes more complexity. Legal and tax regimes are often very different.
As well, Canada only has two tax treaties that may offer relief from possible double taxation on death—the U.S. and France.
The first step is awareness and identification of the issue with professional assistance and then dealing with it with effectively.
For Further Reading
Estate Planning When A Child Moves to the U.S., May 26, 2020
Multiple Taxation on Death: The Taxpayer’s Nightmare, April 3, 2017
The Two Certainties: Death and (Foreign) Taxes, June 23, 2016
— Margaret O’Sullivan