Do Life Insurance and RRSP Payouts Attract Estate Tax in Ontario?

If you are named as beneficiary of a life insurance policy or a registered plan, you may wonder whether the money is taxed as part of the estate. Under Ontario's Estate Administration Tax, the answer turns on who is named. The same question matters to the person who is handling the estate and trying to work out its value.

This article explains the general rules and the key exceptions, and walks through the filing steps that follow once a probate certificate is issued. It does not cover income tax, which is a separate matter for an accountant. How this applies to your own policies and plans depends on your situation, so it is worth confirming with a lawyer.

The basic rule

Estate Administration Tax is charged only when an estate certificate (probate) is applied for and issued. If no certificate is applied for or issued, no tax is owed. The tax is paid as a deposit when the probate application is filed with the court, and once the certificate is issued the deposit becomes the tax.

The tax is paid by the estate, not personally by the estate representative. It is based on the estate's value, and assets the deceased no longer owned at death, such as insurance paid to a named beneficiary, are left out of that value.

Registered plans with a named beneficiary

RPPs, RRSPs, RRIFs and TFSAs that have a beneficiary designation or declaration are left out of the estate's value. In plain words, when a plan passes directly to a named person, it generally does not push up the value on which probate tax is figured.

• Insurance paid to a named beneficiary: left out.
• RPPs, RRSPs, RRIFs and TFSAs with a designation or declaration: left out.
• CPP death benefits: left out.
• Jointly owned assets that pass automatically to the surviving owner or owners: left out.

Joint ownership works differently from a beneficiary designation, but it can lead to a similar result. When a joint tenant dies, the surviving co-owners inherit the deceased's share of the property. A tenant in common is different: that person's share does not pass automatically to the other owners, and it becomes part of the estate, so it counts toward the estate's value if probate is sought.

When the estate is named

RRSPs, RRIFs and TFSAs whose beneficiary is the estate are included in the estate's value. Insurance is included if the proceeds are payable to the estate. In those cases the money adds to the value on which tax is calculated.

For estate certificates applied for on or after January 1, 2020, no tax is payable on an estate worth $50,000 or less. Above $50,000 the tax is $15 for every $1,000 (or part of $1,000) of value over $50,000. To calculate the tax, the estate's value is rounded up to the nearest thousand dollars.

Applications made before January 1, 2020 used older rates, so the figures above apply only to newer applications.

Valuation and records

Assets are valued at their fair market value at the time of death. Estate representatives must be able to back up the asset values with supporting documents, such as statements or an appraiser's opinion of value.

Only encumbrances on real property can be deducted. Funeral expenses, lawyer's fees, loans and interest, vehicle debt, credit card debt, real estate commissions, unregistered loans and lines of credit do not reduce the estate's value. The exception is a mortgage, collateral mortgage or lien registered against real property that is part of the estate, which can be deducted from that property's value.

The estate's value also includes bank accounts, investments, vehicles, business interests and other property wherever it is located. Real estate outside Ontario is left out.

Filing the return and fixing mistakes

The estate representative must file an Estate Information Return with the Ministry of Finance within 180 calendar days after the estate certificate is issued. This is required even when the estate is worth $50,000 or less and no tax is owed. If a filing deadline falls on a weekend or holiday, it moves to the next business day.

• Filing the return online is recommended. It can also be filed by mail, courier, fax or in person.
• The records supporting the return must be kept for four years at the estate representative's principal place of business or residence.
• If information in a filed return turns out to be incorrect or incomplete, an amended return must be filed within 60 days of becoming aware of it, and this duty applies within four years of the certificate being issued.
• If assets are discovered after the certificate is issued, an amended return listing them is due within 60 days after the statement of that property is delivered to the court.

An estate representative who fails to file the return, or who makes false or misleading statements, may be fined at least $1,000 and up to twice the tax payable by the estate, imprisoned for up to two years, or both. The Ministry of Finance may assess or reassess an estate's tax within four years after the day the tax was due. If a return was not filed on time or a misrepresentation was made, there is no four-year limit.

What to do next

• Find each policy and plan and read who is named as beneficiary.
• Note any that name the estate or have no valid designation.
• Collect statements showing values at the date of death.
• Ask the insurer or plan administrator how the payout will be made.
• Keep the records you use to value the estate in one place.
• Speak with a lawyer about probate, and an accountant about income tax.

Frequently asked questions