- Tax after a death is reported on the deceased's final return, which the legal representative files.
- A person who dies is treated as having sold their property just before death at fair market value, which can create a capital gain or loss.
- Spousal rollovers, the principal residence rules and farm property rules can change the result.
When families hear about an estate tax or a death tax, they often picture a bill that arrives separately from everything else. The reality is different: the tax rules after a death work through the deceased's final income tax return and, in some cases, a return for the estate.
This article explains how that works in Alberta, which is mostly through federal income tax rules. It covers the deemed disposition, the treatment of registered plans, and the main exceptions your lawyer or accountant will look at.
This article covers the law of Alberta.
What people mean by a death tax
There is no single form called a death tax in the rules covered here. Instead, the tax comes from how income and property are treated when someone dies. A final T1 return must be filed for every person who dies, and the legal representative files it. It reports the deceased's property, investments and other taxable income, and the legal representative may claim deductions and credits to reduce what is owed.
If you want a confirmed answer on whether any other tax applies to a particular estate, ask a lawyer or accountant to check it against your facts.
The deemed disposition: treated as sold at death
A deceased taxpayer is treated as having disposed of each capital property immediately before death for proceeds equal to its fair market value, and the person who acquires it is treated as acquiring it at that value. No sale needs to happen, but a capital gain or loss may result.
The gain or loss is the fair market value on the date of death minus the adjusted cost base. The legal representative reports it on Schedule 3 and line 12700 of the final return. The CRA's capital gains inclusion rate is one-half, and the planned increase was cancelled.
The tax falls on the final return, so it is paid out of the estate and not by the heir. A beneficiary who later sells reports that sale on their own T1.
Registered plans and amounts owed to the deceased
The CRA treats the annuitant as having received, just before death, the fair market value of all RRSP property, and that amount is included in income in the year of death. A RRIF is treated the same way. A named beneficiary does not pay tax again on an amount already included in the deceased's income.
Amounts the deceased was owed but had not received, other than capital property, are included in the final-year income at their value at death.
Exceptions that can change the result
| Situation | What can change |
|---|---|
| Spouse or common-law partner | Property can be treated as disposed of at adjusted cost base rather than fair market value, if the spouse is a Canadian resident and the property is locked in within 36 months |
| Election out of the rollover | The legal representative can elect, property by property, to use fair market value instead |
| Principal residence | The gain may be fully or partly exempt, but it must still be reported with Schedule 3 and Form T1255 |
| Spouse as sole RRSP beneficiary | The RRSP value is not treated as received if the property is transferred to the spouse's plan by December 31 of the year after death |
| Farm or fishing property | Special rules may apply |
Capital losses also have special treatment. On the final return and the prior-year return, net capital losses can reduce other sources of income, not just capital gains.
What to do next
The right planning depends on what the person owned and who receives it. Gathering information early helps your lawyer or accountant work out the tax picture.
- List every asset, with its value at the date of death and its original cost where you can find it.
- Identify RRSPs and RRIFs and who is named as beneficiary.
- Note whether the person had a surviving spouse or common-law partner, and whether they were a Canadian resident.
- Note any home, farm or business property.
- Ask a lawyer or accountant whether any elections apply before property is distributed.
Frequently asked questions
Does Alberta have a death tax?
The rules covered here do not describe a separate death tax. Instead, tax is reported on the deceased's final return, and the estate may also file a T3 return. Ask a lawyer or accountant to confirm how this applies to a particular estate.
Do heirs pay the capital gains tax on inherited property?
The capital gains tax from the deemed disposition falls on the deceased's final return, so it is paid out of the estate and not by the heir. A beneficiary who later sells reports that sale on their own return.
Is the family home taxed at death?
Gains on a home may be fully or partly exempt, but the property must still be reported using Schedule 3 and Form T1255. A transfer to a spouse requires no designation or deemed disposition on the final return.
Can the spousal rollover be avoided?
Yes. The legal representative can elect in the deceased's return not to use the spousal rollover, and the election is made property by property. Whether that makes sense depends on the facts, so get advice first.
Sources
- CRA – What returns you need to file — canada.ca
- CRA – Prepare tax returns for someone who died — canada.ca
- CRA – Filing and payment due dates — canada.ca
- Income Tax Act, s. 70 — Justice Laws (federal)
- CRA – Deemed disposition of property for deceased taxpayers — canada.ca
- CRA – Taxable capital gains on property, investments, and belongings — canada.ca
- CRA – Line 12700 capital gains — canada.ca
- CRA – RC4177 Death of an RRSP Annuitant — canada.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
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