Is There an Estate Tax in Alberta? How Estates Are Taxed

When someone dies, families often ask whether Alberta or Canada charges an estate tax on what is left behind. The question is understandable, because the amounts involved can feel large and the process is unfamiliar.

Much of the tax connected to a death is dealt with through the income tax system, and whether anything else applies to your situation is worth confirming with a lawyer or accountant. It is reported on the deceased person's final return and, in some cases, on a separate return for the estate. This article walks through how that works so you know what an executor is generally dealing with.

This article covers the law of Alberta.

How tax is reported after a death

A final T1 income tax return must be filed for every person who dies, and the legal representative files it along with any optional returns. That return reports the deceased's property, investments and other taxable income, and the legal representative may claim deductions and credits to reduce what is owed.

Beneficiaries are generally taxed only on amounts paid to them that the estate deducts. So the tax picture usually sits with the final return and the estate, rather than with the person who receives an inheritance. Whether any particular situation is an exception is worth confirming with a lawyer or accountant.

The deemed disposition: a sale that never happens

When a person dies, they are considered to have sold all their property just before death, even though no sale occurs. This may create a capital gain or loss. Each capital property is treated as sold for its fair market value at that time, and the person who acquires it is treated as acquiring it at that value.

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 tax falls on the final return, so it is paid from the estate, not by the heir. If a beneficiary later sells the property, they report that sale on their own return using the fair market value from the final return as their starting cost.

The CRA's capital gains inclusion rate is one-half, and the planned increase was cancelled.

Exceptions that can change the result

• Spouse or common-law partner rollover: property passing to a Canadian-resident spouse, common-law partner or qualifying spousal trust is deemed disposed of at adjusted cost base instead of fair market value.
• Conditions: the spouse or partner must be a Canadian resident at death, and the property must be locked in for them no later than 36 months after death.
• Election out: the legal representative can elect not to use the rollover, property by property.
• Principal residence: gains on a home may be fully or partly exempt, but it must still be reported using Schedule 3 and Form T1255.
• Farm or fishing property: special rules may apply to qualified property.

RRSPs, RRIFs and other amounts owed to the deceased

The CRA considers an RRSP annuitant to have received, just before death, the fair market value of all RRSP property, and that amount is included in income for 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, so the tax generally falls on the final return and is paid from the estate. The exception is a refund of premiums: a spouse or common-law partner, or a child or grandchild who was financially dependent because of a physical or mental impairment, can roll it into their own RRSP, RRIF, PRPP, SPP or eligible annuity, while a non-dependent child or grandchild can only move it into a term annuity. The transfer must be made in the year the amount is received or within 60 days after year-end, and for an RRSP the survivor must be 71 or younger at year-end. If the plan pays to the estate, the legal representative and the qualifying survivor can jointly file Form T2019 to reduce the amount included in the deceased's income.

There are other exceptions. If a spouse or common-law partner is the sole designated beneficiary of an RRSP and all the property is transferred to their own qualifying plan by December 31 of the year after death, the deemed receipt does not apply. A RRIF has similar relief where the spouse or partner is the successor annuitant, or the sole beneficiary with a timely transfer.

Amounts the deceased was owed but had not received, other than capital property, are included in final-year income at their value at death.

The estate's own return and what to do next

The estate may also need to file a T3 trust return, due 90 days after the trust's tax year-end, or after the date of final distribution if the trust ceases to exist. A late T3 may attract a penalty even if nothing is owing. Sales made by the estate after death are reported on a T3. A graduated rate estate is taxed at graduated rates like an individual, and can only hold that status for up to 36 months after death.

• List the deceased's assets with their date-of-death values and original costs.
• Identify RRSPs, RRIFs and any spouse or partner beneficiaries.
• Note any business, farm or rental property.
• Find out whether the deceased filed last year's return.
• Speak with a lawyer or accountant before distributing anything to beneficiaries.

Frequently asked questions