Understanding Departure Tax on Inheritance Windfall or Insurance

When you inherit money or receive an insurance payout, it's often a moment mixed with both relief and confusion. One common question is whether you must pay taxes on this windfall, particularly if it comes from someone who has moved or is living outside of the country. This is where the concept of "departure tax" comes into play.

What is Departure Tax?

Departure tax is a tax that some countries impose on individuals who are leaving the country and giving up their tax residency. It’s often referred to as Exit Tax. The idea is that the country wants to ensure it gets its share of taxes before someone permanently leaves its jurisdiction. This tax is typically applied to the unrealized gains on assets that the individual owns at the time of departure, like stocks, property, or other investments.

Departure Tax on Inheritance

If you inherit assets from someone who has paid a departure tax because they left the country, those assets might already have been taxed on their unrealized gains. This means that the value of what you inherit could be lower because the person who gave it to you had to pay taxes on it before they left. However, once the assets are transferred to you as inheritance, they usually aren't taxed again as part of the departure tax.

Departure Tax on Insurance Payouts

Insurance payouts, such as life insurance, are typically not considered taxable income for the beneficiary. This means that if you receive an insurance payout after someone passes away, you don't have to worry about paying taxes on that money. The departure tax generally doesn’t apply to insurance payouts, as they are not considered capital gains or investments.

Important Considerations

Dealing with taxes on inheritance or insurance payouts can be tricky, but knowing the basics helps you feel prepared. The important thing to keep in mind is that while getting the windfall itself might not be taxed, what you do with the assets later could lead to taxes if you move to another country.

For more information, visit: Canada Revenue Agency