- Tax at death mostly arises because the person is treated as having sold their capital property just before death.
- Spousal rollovers, optional returns and loss claims are among the tools that may reduce the bill.
- Tax from deemed dispositions can in some cases be paid in up to 10 annual instalments if security is given.
A large final tax bill often surprises families. It usually comes from deemed sales of property and from registered plans being included in income, not from an inheritance tax on the people who receive the assets.
There are lawful ways to lessen or spread the bill. Which ones apply depends on who inherits what, so this article gives an overview to discuss with an accountant.
Why the bill can be large
A person is deemed to have disposed of each capital property immediately before death at its fair market value. This applies even if nothing was actually sold, and it covers real estate, investments and personal belongings. Only the taxable portion of a capital gain is included in income, and the inclusion rate is one-half.
For an unmatured RRSP, the deceased is treated as having received the fair market value of all property in the plan, and that amount is included in income on the final return.
Transfers to a spouse or common-law partner
Property that passes to a spouse, a common-law partner or a qualifying spousal trust generally rolls over at the deceased's adjusted cost base instead of fair market value. It must vest indefeasibly in the recipient within 36 months after death, and the Minister can extend that period.
The legal representative can elect, one property at a time, not to use the rollover, which can be useful to realize gains or losses on the final return.
| Asset | Possible treatment |
|---|---|
| RRSP to survivor's RRSP, RRIF, PRPP, SPP or eligible annuity | No T4RSP in the deceased's name if all property goes there before the end of the year after death |
| RRIF | Survivor can become successor annuitant, so the full value is not taxed on the final return |
| TFSA | Survivor named successor holder takes ownership; growth stays sheltered |
| Financially dependent child or grandchild with impairment | Payments can roll over to an RDSP if dependent because of impairment |
Homes, farms and losses
The principal residence must still be designated on the final return, using Schedule 3 and Form T1255, even if the exemption covers the whole gain. If the home passes to a surviving spouse or common-law partner, no deemed disposition or gain has to be reported. Qualified farm or fishing property transferred to a child is a separate exception that can affect the gain.
Net capital losses for the year of death and the year before can be deducted from income other than capital gains on the final return. The legal representative can also elect to treat certain losses of a graduated rate estate as losses of the deceased.
Optional returns, instalments and gifts
- Optional returns, such as a rights or things return, can lower total tax because each return starts at the lowest brackets.
- The legal representative can elect, with acceptable security, to pay tax from deemed dispositions in up to 10 equal annual instalments.
- Charitable gifts can also affect the tax picture, but the rules on how and when credits apply are worth confirming with an accountant.
What to do next
- Gather date-of-death values for property, investments and registered plans.
- Identify which assets go to a spouse or common-law partner.
- Check which optional returns might apply.
- Confirm filing dates; for a death from January 1 to October 31 the final return is due April 30 of the next year.
- Get an accountant's comparison of options before filing or distributing.
Filing late brings a penalty of 5% of the balance owing, plus 1% for each full month late, up to 12 months.
Frequently asked questions
Does Ontario have an inheritance tax?
Tax at death arises mainly through the deemed disposition of property and income inclusion of RRSPs and RRIFs. Ontario also charges Estate Administration Tax on probated estates.
Can I choose not to use the spousal rollover?
Yes, the legal representative can elect this one property at a time on the return for the year of death.
Can the tax be paid over time?
For tax from deemed dispositions, the legal representative can elect to pay in up to 10 equal annual instalments, with security acceptable to the Minister.
Who pays the tax?
Balances owing to CRA are paid out of the estate's assets.
Sources
- Income Tax Act, s. 70 (Justice Laws) — Justice Laws (federal)
- CRA – Taxable capital gains on property, investments, and belongings (someone who died) — canada.ca
- CRA – Update on administration of proposed capital gains taxation changes — canada.ca
- CRA – T3 Trust Guide — canada.ca
- CRA – Transfer and report RRSPs (someone who died) — canada.ca
- CRA – Report RRIF income (someone who died) — canada.ca
- CRA – If you are a successor holder of a TFSA — canada.ca
- CRA – What returns you need to file (someone who died) — canada.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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