- Tax on a death is generally dealt with on the deceased's final return and the estate's returns, not by the beneficiary receiving the inheritance.
- On death, a person is considered to have sold their property just before death, and any resulting gain is reported on the final return.
- An estate may need to file a T3 return when it allocates income to beneficiaries and has income over $500.
- Ontario estate administration tax depends on the value of the estate, and there is none if the estate is $50,000 or less.
If you are waiting on an inheritance, you may be wondering whether a tax bill will arrive with it. Whether any tax applies to what you receive depends on the kind of asset and the estate's situation.
That does not mean tax is irrelevant. Taxes are generally settled by the estate before assets are handed over, and whether any amount you receive is taxable to you depends on what it is, so it is worth confirming with an accountant. This article explains the difference.
Who pays the tax when someone dies
The deceased's legal representative files a final T1 return for the person who died, and the estate may file its own returns for income earned after death. Any tax owing is usually paid from estate funds before beneficiaries receive their shares.
This is why your share can end up smaller than you expected. The estate may be paying tax on the deceased's final year, on gains triggered by death, and on the Ontario estate administration tax. How these rules apply to a particular estate is worth confirming with an accountant or lawyer.
Tax that comes out of the estate before you are paid
On death, a person is considered to have sold all their property just before death. Capital property is treated as disposed of at fair market value, and the gain or loss is reported on Schedule 3 of the final return. Before distributing property, the legal representative must obtain a clearance certificate, and distributing without one can make them personally liable for unpaid amounts up to the value of the property distributed.
- Capital property: the gain is reported on the final return, not by the beneficiary.
- Unmatured RRSP: the fair market value of the plan is included in the deceased's income on the final return.
- Principal residence: the designation applies only until the date of death, and even if the gain is fully exempt the sale must be reported and the property designated on Form T1255.
- Spouse or common-law partner: property may be rolled over with no gain or loss on the final return if it vests indefeasibly in the spouse or partner within 36 months of death.
The legal representative may elect out of the automatic spousal rollover. That is a decision for the executor with professional advice.
Ontario estate administration tax
For estate certificates applied for on or after January 1, 2020, there is no estate administration tax if the estate is $50,000 or less. Above that, the tax is $15 per $1,000 (or part). How that works out for a particular estate is worth confirming with a lawyer.
The value includes Ontario real estate (less mortgages and liens), bank accounts, and investments, and RRSPs, RRIFs and TFSAs with no beneficiary designation. It excludes jointly owned assets that pass automatically to the surviving owner and assets with a named beneficiary, such as insurance, RRSP, RRIF, TFSA or RPP.
When you may owe tax yourself
Although the inheritance itself is generally not taxed to you, certain amounts you receive can be taxable.
| What you receive | How it may be taxed |
|---|---|
| Income earned by the estate after death and allocated to you | How it is taxed to you depends on the facts and is worth confirming with an accountant; the estate may have to file a T3 return in some cases. |
| CPP or QPP death benefit | Where the only post-death income is reported by a beneficiary, no T3 is needed. |
| RRSP refund of premiums as a qualifying survivor | Taxed to you instead of the deceased. A spouse, common-law partner, or financially dependent child or grandchild qualifies, and the amount may be transferred to an RRSP, RRIF or similar plan with an offsetting deduction. |
| RRIF amounts | A surviving spouse, or a recipient 65 or older at December 31, reports them on line 11500; other recipients under 65 use line 13000. |
A refund of premiums can be transferred to a beneficiary's RRSP only if the beneficiary is 71 or younger at the end of the transfer year, and the transfer must be completed in the year received or within 60 days after year-end.
What to do next
If you expect an inheritance, a few practical steps can help you plan. Keep in mind that the executor may hold back funds until the estate's tax is dealt with, because the executor needs a clearance certificate before distributing property.
- Ask the executor what kinds of assets are in the estate, and whether any are RRSPs or RRIFs.
- Ask whether the estate expects to file a T3 return and allocate income to you.
- Keep any tax slips you receive from the estate and give them to your accountant.
- Do not spend your expected share until the executor confirms the estate's tax is settled.
- If you are a surviving spouse or dependent child, ask about rollover and transfer options before deadlines pass.
Frequently asked questions
Is there an inheritance tax in Ontario?
The estate can owe Ontario estate administration tax: nothing if the estate is $50,000 or less, and $15 per $1,000 (or part) above that for certificates applied for on or after January 1, 2020. How tax applies to what you personally receive depends on the assets involved, so it is worth confirming with an accountant or lawyer.
Do I report an inheritance on my tax return?
Whether and how an amount is reported on your return depends on what you received, so check with an accountant. If the estate allocates income to you, it is worth raising with them.
Why is my payout smaller than the estate's value?
The estate may pay tax on the deceased's final return, including gains deemed to occur on death, plus estate administration tax. Funeral costs and legal fees also come out of the estate, though they cannot be deducted as personal expenses on the deceased's returns.
Do I pay tax if I inherit an RRSP or RRIF?
It depends on who you are. An unmatured RRSP is generally included in the deceased's income on the final return, but a qualifying survivor can have the refund of premiums taxed to them instead, with a possible transfer to their own plan.
Sources
- CRA – What returns you need to file — canada.ca
- CRA – T3 Trust Guide — canada.ca
- CRA – Taxable capital gains on property, investments and belongings — canada.ca
- CRA – RC4177 Death of an RRSP annuitant — canada.ca
- CRA – Amounts paid from an RRSP or RRIF upon the death of an annuitant — canada.ca
- CRA – Claim deductions and tax credits — canada.ca
- Income Tax Act, s. 159 (Justice Laws) — Justice Laws (federal)
- Ontario – Estate Administration Tax — ontario.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
This is a wills & estates question
Start a file online — flat, published fees, reviewed by a licensed lawyer before a dollar is owed.