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SUCCESSION DUTIES

  1. What are succession duties?
  2. Are succession duties, inheritance taxes and estate taxes all the same?
  3. Do succession duties, inheritance taxes or estate taxes currently exist in Canada?
  4. How are succession duties charged?
  5. If I am a Canadian resident with part of my estate held in the U.S., do I have to pay U.S. estate or succession duties?
  6. What steps can I take now to avoid paying succession duties if they are re-introduced in Canada?
  7. What countries, other than the U.S., currently levy succession duties?

Appendices:

  1. "Estate Taxes" from November 24, 1995 issue of Sales Bulletin
  2. Sales Bulletin #4825 dated September 8, 1994 on U.S. Estate Taxes
  3. Federal Estate Tax Rate Schedule as of March 1989

1. What are succession duties?

Succession duties are often referred to as either a wealth transfer tax or an inheritance tax, which are paid by the person receiving an inheritance.

2. Are succession duties, inheritance taxes and estate taxes all the same?

All of these charges result in a reduction in the share of the estate the beneficiaries receive, so for all intents and purposes, they are the same. Succession duties and inheritance taxes are charged to the beneficiaries, usually in proportion to the share they are receiving, while an estate tax is levied against the total value of the estate.

3. Do succession duties, inheritance taxes or estate taxes currently exist in Canada?

There are no Canadian succession duties, inheritance taxes or estate taxes at this time. From time to time, most provinces have levied succession duties, as has the federal government. Quebec was the last province to get out of the succession duty field back in 1986. Note that a Canadian resident can be subject to succession duties in other countries. There are no Canadian succession duties,inheritance taxes or estate taxes at this time.For example, the United States and the United Kingdom currently levy succession duties.

4. How are succession duties charged?

As we have noted, no succession duties currently are charged in Canada. As an example of how succession duties have been charged, Quebec's 1978 Succession Duty Act taxed each beneficiary on the amount inherited at a single rate of duty which was progressive and based on the taxable value of the property. Any variation on this theme would be possible if succession duties are ever reintroduced.

5. If I am a Canadian resident with part of my estate held in the U.S., do I have to pay a U.S. estate or succession duty?

An agreement between Canada and the U.S. on the imposition of U.S. estate taxes was ratified in late 1995, and it applies to estates of Canadian residents who died after November 10, 1988.

Canadian residents are eligible for a basic exemption of up to US $600,000 on estate taxes on property situated in the United States. This is an increase from the former exemption of US $60,000. The actual amount of the credit is pro-rated, based on the value of the estate assets situated in the United States to the total value of worldwide assets of the estate. Note that the agreement was retroactive to November 10, 1988. The estate of any Canadian resident who died after November 10, 1988 and was subject to U.S. estate tax may apply for a refund based on the new rules.

Property which is considered to be located in the U.S., and subject to U.S. estate tax, includes real property located in the U.S., personal property located in the U.S. (including clothing, jewellry, automobiles, furniture or currency), and shares of stock issued by U.S. corporations. In some cases, amounts on deposit with U.S. banks and other investments in the U.S. will be subjected to U.S. succession duty, particularly if the amounts are connected with a U.S. trade or business. Life Insurance proceeds received on the death of an individual who was neither a resident nor a citizen of the U.S. are not subject to U.S. federal estate taxes, even if paid by a U.S. company. A U.S. tax specialist should be consulted to confirm whether a particular item is located in the U.S. and thus potentially subject to estate tax.

There are certain deductions allowed from the gross estate (charitable, marital, expenses, funeral etc.) before the calculation of the U.S. federal estate tax.

Your clients should consult with a U.S. tax specialist for assistance with the U.S. estate tax liabilities.

6. What steps can I take now to avoid paying succession duties if they are reintroduced in Canada or in various provinces?

Until any provincial and/or federal legislation exists in respect of succession duties, no one can be certain what assets or under what conditions any potential succession duties would be avoided. If Canada follows the U.S. pattern, transactions that occurred in prior years (in the U.S. - three years prior to death), could be taxed. Due to the uncertainty as to what form future succession duties might take, if any were introduced, concerned clients should check with their tax lawyer or accountant for assistance.

7. What countries, other than the U.S., currently levy succession duties?

The United Kingdom. As to other jurisdictions, one must check with a specialist in the foreign jurisdiction.