In 1789, one of the founding fathers of the United States, Benjamin Franklin, famously wrote in a letter that “In this world nothing can be said to be certain, except death and taxes.” So true. But what happens when a death occurs? Does the taxman take an interest?

Around the world, the answer is an emphatic “yes.”

However, the form of such taxes can vary widely. For example, some countries have an estate tax based upon the fair market value of the decedent’s property at death. There is often a basic exemption for such amounts so that it is only the amount of the estate in excess of that exemption that is subject to tax. The U.S. and a handful of other countries, such as the United Kingdom, South Korea and Denmark, have a traditional estate tax.

In the U.S., it’s fair to say the estate tax is more of a symbolic tax. It was originally established in 1916 with the stated policy objective of preventing dynastic wealth accumulation. The exemption amount is now US$15 million (but it will be indexed to inflation starting in 2026) as implemented by the

One Big Beautiful Bill

. Such a large exemption exempts the vast majority of deaths from the tax.

For example, in 2022, the U.S. estate tax applied to only about 3,900 taxable estates — roughly 0.11 per cent of deaths — and raised approximately

US$22.5 billion

out of

total federal revenues

of approximately US$4.9 trillion.

In other words, it’s a pittance. Most tax practitioners know it’s pretty easy to walk around the U.S. estate tax. It’s fair to say the estate tax has failed to achieve its original policy objective.

In other countries, an inheritance tax is common, and the recipients of a deceased’s estate pay it. Countries such as Germany, France, Belgium and others deploy this type of regime.

There are a variety of other death tax regimes, like a

capital acquisitions tax

in Ireland that is triggered when an individual acquires wealth, either through inheritance or gifts. Chile has a similar regime. Other countries, such as Greece, Italy and parts of Latin America, have stamp or notarial duties that apply when people register their inheritances.

What about Canada? It introduced an estate tax in 1947 and it operated similarly to the U.S. model. In 1966, the Royal Commission on Taxation recommended the country abolish it and instead introduce an inheritance tax.

“The estate tax fails to account for the economic position of those who receive the assets and cannot be properly integrated with a personal tax system based on income and individual ability to pay,” its

report said

about the estate tax.

“We believe that an integrated income tax system should treat all accretions to wealth, whether earned or unearned, as part of the taxpayer’s income, and that gifts and inheritances should be included in income for this reason.”

In the end, after much debate and consideration, the government chose to abolish the estate tax and not introduce an inheritance tax as recommended by the commission.

It appears that, like today, any form of death tax in the late 1960s and early 1970s was very unpopular with voters. Accordingly, Canada decided to introduce a deemed disposition upon death rule as part of the introduction of

capital gains tax

effective Jan. 1, 1972 (previously, capital gains were not taxable).

The new regime treated death as a disposition event of one’s worldwide property, with any resulting gains included in their final income tax return. Such a regime combines with the acceleration of deferred income inclusions — such as

registered retirement savings plans

and

registered retirement income funds

— which are included in income upon death.

This overall regime has had some tweaking over the years, but the basic architecture has remained since 1972.

There are a number of exceptions to the deemed disposition and deemed income inclusion tax. For example, if the deceased’s assets all vest with a surviving spouse or common-law partner, the tax is deferred until the survivor’s death.

Canada’s regime is very unique. Has it served Canada well? It’s fair to say it was and continues to be a clever compromise to avoid the administrative complexities of an estate tax and/or inheritance tax.

It’s also less politically charged than a traditional estate or inheritance tax, which is often thought to be unfair given that it may result in double tax (since assets are usually accumulated with after-tax amounts and taxed again at death) and liquidity issues (the liquidity issue is diminished for an inheritance tax, however).

Notwithstanding, it’s time Canada took another look at how it taxes death.

From a tax policy design perspective, using death as a trigger for taxation makes sense given its administrative efficiency. But does our current regime help prevent dynastic wealth? Should it? Do we care? Are there reasons to not tax upon death so as to assist with generational wealth accumulation, especially for lower- and middle-income families who have modest assets?

Benjamin Franklin wasn’t wrong. Death and taxes are certain. But that doesn’t explain why most Canadians have no idea how the two collide. That lack of financial literacy comes at a cost.

As

trillions in wealth

prepare to shift between generations, Canada cannot keep pretending that our current approach to taxing death is sacrosanct. It may be efficient, but is it fair? Does it need updating?

Prime Minister Mark Carney’s

commitment

to an “expert review” of our corporate tax system is the same tired half-step we’ve seen for decades. What the country needs is a full-scale, unapologetic review of the entire tax system, including how we tax death.

  • Canada’s personal tax rates need to come down. Here’s how to do it
  • CRA keeps messing up despite an increased headcount and bigger budget

It’s time for grown-up conversations before the taxman has the last word.

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody.

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