What Taxes Will I Owe on My Death?

Written by: Marie Kazmer, BCom, JD

We’ve all heard the old adage about death and taxes. While the UK and US impose an ‘inheritance tax’ and an ‘estate tax’ on many estates respectively, there is no ‘death tax’ per se in Canada.  Instead, a death in Canada triggers several potential tax liabilities for the deceased person and their estate.

This post aims to provide clarity around the common tax implications to arise on death for Ontarians and how they differ.

Deemed Disposition: Upon death, individuals are deemed to have disposed of all their capital property at fair market value immediately before death as per the Income Tax Act. This means that for tax purposes, it is as if you sold all of your assets right before passing away. The deemed disposition rule applies to assets such as real estate, investments (stocks, bonds), business interests, and personal property.

Capital Gains: The deemed disposition can lead to capital gains tax if the fair market value of the assets at the time of death exceeds their adjusted cost base (typically, what you paid for them originally plus costs of capital improvements, assuming these costs can be proven). Historically, half of the capital gains (referred to as the taxable capital gain or the inclusion rate) are included in the deceased’s final tax return in their year of death, unless the gains qualify for certain exemptions or deferrals (like the principal residence exemption or certain rollovers to a surviving spouse) or are otherwise offset by eligible capital losses. Starting June 25, 2024 however, the capital gains inclusion rate will be increased from one-half to two-thirds for capital gains of over $250,000 per year for individuals. This change will be especially significant for those holding capital assets of value who intend to eventually pass these assets to future generations within their family.  Many families therefore began accelerating these dispositions before June 25th 2024 to leverage the more favourable capital gains tax treatment.

Registered Accounts: Funds held in Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) are also subject to taxation upon death. The entire value of these accounts is generally included in the deceased’s income for the year of death, with certain exceptions such as rollovers to a surviving spouse. This can result in a significant tax liability depending on the size of these accounts to the deceased’s Estate. Importantly, the designated beneficiaries of these types of plans are entitled to the whole amount on death of the plan holder (not the amount net of tax – which is payable by the Estate).

Tax Free Savings Accounts (TFSAs) are designed to be tax-free during the holder’s lifetime, meaning that any income earned within the account (such as interest, dividends, and capital gains) is not subject to income tax. The income and capital gains accrued within the TFSA up to the date of death are not taxable. However, any income or capital gains earned in the TFSA after the date of death are taxable in the hands of the beneficiary who receives the TFSA assets which can be avoided where an eligible successor annuitant is designated to receive the account

“Probate” ie. Estate Administration Tax: In most provinces, probate fees or estate administration taxes are levied on the estate based on the value of assets passing through the estate. Estate administration taxes are not paid on assets that flow outside of an estate, such as beneficiary-designated assets or where there is a right of survivorship. This is not a federal tax but can be a significant cost depending on the province in which probate is required. In Ontario, for example, the Estate Administration Tax fee structure is as follows:

• $0 per $1,000 for the first $50,000 of the estate
• $15 for every $1,000 (or part thereof) of the value of the estate over $50,000

Effective estate planning can mitigate or defer some of these tax liabilities (hint hint.. look out for my next blog post). In addition to tax liabilities that arise on death, bear in mind that the deceased’s estate will also be liable for any tax liabilities or obligations outstanding as of the date of death, such as regular income tax filing. 

Navigating the tax implications of death in Canada requires careful planning and consideration of various factors. Seeking advice from tax professionals and estate planning experts can help ensure that your estate plan takes into consideration your specific tax liabilities and efficiently transfers wealth to your beneficiaries according to your wishes.

Thanks for reading!

Disclaimer: I am not a tax lawyer or qualified tax professional, but we consult with and partner with tax experts in our daily practice of estates law. We provide general tax-related information therefore, but not tax advice.