In 1789, one of the Founding Fathers of the United States, Benjamin Franklin, famously wrote in a letter, “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?  Well, 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 which levies a tax based upon the fair market value of the decedent’s property at death.  Often, there is 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 United States, along with a handful of other countries like U.K, South Korea and Denmark have a traditional estate tax.

In the U.S., I think 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 a permanent $15M (with such amount to be indexed to inflation starting in 2026) 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% of deaths – and raised approximately $22.5 billion out of total federal revenues of approximately $4.9 trillion.  In other words, it’s a pittance.  And most tax practitioners know that it’s pretty easy to walk around the U.S. estate tax.  I think it’s fair to say the estate tax has failed to achieve its original policy objective.

In other countries, an inheritance tax is common where the recipients of a deceased’s estate will pay a tax.  Countries like 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 where the tax is triggered when an individual acquires wealth, either through inheritance or gifts.  Chile has a similar regime. Other countries, like Greece, Italy and parts of Latin America have stamp or notarial duties that apply when people register their inheritances.

But what about Canada? Canada had an estate tax that was introduced in 1947 and operated similar to the U.S. model.  In 1966, The Royal Commission on Taxation recommended that Canada should abolish its estate tax and instead introduce an inheritance tax.  It stated the following about the estate 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.”

And, further in its Report, it stated:

“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 January 1, 1972 (prior to that date, capital gains were not taxable in Canada).

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 – like RRSPs / RRIFs – whereby such deferred amounts are deemed 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, then the tax is deferred until the death of the survivor.  There are other limited exceptions as well.

Canada’s regime is very unique when compared to others around the world.  Has it served Canada well?  I think it’s fair to say that 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 the fact 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, I think it’s time for Canada to take another look at how it taxes death.  I believe, 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 to 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 to middle-income families who have modest assets?

Benjamin Franklin wasn’t wrong. Death and taxes are certain. But such a fact doesn’t explain that 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? Mark Carney’s promise of an “expert review” of our corporate tax system is the same tired half-step we’ve seen for decades. What Canada needs is a full-scale, unapologetic review of the entire tax system including how we tax death.

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