The Canadian concept of taxing the deceased by deeming a disposition at death is contrary to many countries where the inheritance tax is paid by the heirs upon receiving money or properties from a deceased person. In other words, while Canada taxes the deceased on death, most countries – notably most countries in the European Union (EU) – tax the beneficiaries. Therefore, any proceeds received as a consequence of death will be subject to the inheritance tax and it will be the responsibility of the beneficiaries to pay the tax.

Usually, the inheritance tax applies to any assets that form part of the estate and it may also apply to proceeds from life insurance, registered accounts, and, in some instances, a trust. In many jurisdictions, even an inter vivos gift received from a Canadian resident may be taxed in the hands of the recipient. It is also worth noting that, in most EU countries, the inheritance tax applies to the patrimoine[1] of the deceased.

When a client advises that a beneficiary lives in a foreign country, the advisor ought to consider whether that beneficiary may be subject to inheritance tax. The distinction is important for estate planning purposes since we are dealing with two distinct taxpayers – the Canadian transferor and the beneficiary taxpayer in the foreign country. This can result in a double taxation issue where Canada taxes the capital gain of the deceased in the year of death and the beneficiary is taxed on the inheritance received (representing the after-tax proceeds of the estate). Further, a Tax Treaty between Canada and the foreign country may provide only limited relief and usually does not protect against the potential loss of foreign tax credits.

Inheritance Tax Rate

In some instances, Canadian testators are surprised to learn the inheritance tax rate their beneficiary may be paying. As an example, the inheritance tax can be up to 55% in Japan[2] and 50% in South Korea[3]. In France, the inheritance tax varies but can reach 60%[4] if the beneficiary is unrelated to the testator. One must remember the inheritance tax is paid after the Canadian capital gain tax has been paid by the estate.[5]

Interestingly, there are six (6) U.S. States that have an inheritance tax levied on the beneficiary – Iowa[6], Kentucky, Maryland, New Jersey, Pennsylvania and Nebraska. Each of those States have their own inheritance tax rate which makes the analysis even more challenging.

If a beneficiary resides in an inheritance tax jurisdiction, any distribution from the Canadian estate will likely result in the beneficiary being taxed on the inheritance received. This is often overlooked by the testator and the estate advisor. One of the key components to a proper estate plan in such situation may be to open communication with the beneficiary and possibly, insert potential foreign estate planning strategies to the Canadian estate plan; easier said than done.

Cross-border estate and tax planning is complex and likely costly. Canadian advisors will work closely with foreign professionals to minimize the cross-border tax implications (if possible) but ultimately, the testator must be wiling to embark on this venture, which is not always an easy decision.

Note: many countries that have an inheritance tax also tax the donee on gifts received.  This adds a wrinkle to the estate plan.

[1] Patrimoine is essentially all movable and immovable property owned by the individual at the time of death and may also include property owned during the individual’s lifetime but given away before death.

[2] There is a basic exemption of ¥30 million.

[3] There is a basic exemption of ₩3 billion.

[4] In fairness, the France inheritance tax depends on the value received and the proximity between the deceased and beneficiary(ies).

[5] This article does not address potential Canadian withholding tax on payments made to the foreign beneficiary but it should not be overlooked.

[6] As of 2025, Iowa will no longer have an inheritance tax.