Leaving Assets to a Surviving Spouse in Ontario: Is There Tax at Death?

When someone dies leaving a spouse or common-law partner, one of the first tax questions is whether the estate owes tax on what the survivor inherits. The answer depends on what the asset is and how it passes.

This article explains the general rule, how the spousal rollover softens it, and how it applies to the home, RRSPs, RRIFs, TFSAs and certain government plan balances. It is general information. An estate trustee or survivor with a complicated situation should confirm the details with a lawyer or accountant.

The general rule: death is treated as a sale

Under the Income Tax Act, a person is deemed to have disposed of each capital property immediately before death. The deemed proceeds are the property's fair market value at that time, and the person who acquires it generally takes that value as their cost.

This applies even if nothing is actually sold. Capital property includes real estate such as homes and cottages, investments such as stocks, mutual funds and crypto-assets, and personal belongings such as art, collections and jewellery.

Only the taxable portion of a capital gain is included in income, and the inclusion rate is one-half. The proposed increase to that rate was cancelled. The resulting tax is reported on the deceased's final T1 return, which is filed for every person who dies.

How the spousal rollover works

There is an exception for spouses. Property of a deceased who was resident in Canada that passes to a spouse, a common-law partner or a qualifying spousal trust rolls over at the deceased's adjusted cost base instead of fair market value. The property must vest indefeasibly in the recipient within 36 months after the death, and the Minister can extend that period.

In plain terms, no gain is taxed on the final return for that property at that time. The tax is pushed forward until the survivor later sells the property or dies.

The rollover is not always the best result. The legal representative can elect, one property at a time on the return for the year of death, not to use it. The deemed disposition at fair market value then applies to that property, which can be used to realize gains or losses on the final return. Net capital losses for the year of death and the year before can also be deducted from other income on the final return. Whether an election makes sense depends on the numbers, so it is worth discussing with an accountant.

The home, RRSPs, RRIFs, TFSAs and plan balances

Different assets follow different spousal rules. The table gives a quick comparison.

Some details matter. For the home, the legal representative should still keep records of the years the deceased could have designated. For an RRSP that goes to the survivor's plan, the survivor reports the payment and claims an offsetting deduction. If the estate is the named RRSP beneficiary and the survivor is entitled under the will, the survivor and the legal representative can jointly elect in writing to treat the estate's payments as paid to the survivor, and the election is attached to the survivor's return.

A RRIF survivor can become successor annuitant by a written election, or with the legal representative's consent and the carrier's agreement. For a TFSA, taking over as successor holder does not affect the survivor's own contribution room, as long as the deceased's TFSA had no excess amount. A spouse who is only named as a beneficiary, not as successor holder, is treated differently.

Delay, not cancellation, and other cautions

The rollover defers tax. Because the survivor takes on the deceased's original cost rather than a fresh fair market value, the gain that built up over the deceased's lifetime is still there when the survivor later sells or dies.

• Joint liability: a person who receives RRIF amounts because of the annuitant's death is jointly and severally liable with the deceased for part of the deceased's tax for the year of death, so CRA can collect that tax from the recipient.
• Survivor's own return: it is due on the later of the survivor's normal due date and 6 months after the death, but any balance owing must still be paid by April 30 to avoid interest.
• Final return: for a death between January 1 and October 31, the final return and any balance owing are due April 30 of the year after the death.
• Late filing: the penalty is 5% of any balance owing, plus 1% for each full month the return is late, up to 12 months, and interest runs on unpaid amounts.

If the deceased or a cohabiting spouse or common-law partner ran a business, the final return is due June 15 of the year after the death for deaths between January 1 and December 15, and 6 months after the death for deaths between December 16 and 31, but that later date does not apply if the business's expenditures were mainly for tax shelter investments, and any balance owing must still be paid by the regular payment due date.

What to do next

• List every asset and note who is receiving it, and whether that person is a spouse, common-law partner or spousal trust.
• Check the beneficiary or successor designations on each RRSP, RRIF and TFSA.
• Confirm the property will vest in the survivor within the time allowed.
• Keep records of the years the deceased could have designated the home as a principal residence.
• Ask an accountant whether electing out of the rollover for any property would help on the final return.
• Before distributing estate property, obtain a clearance certificate from the Minister, since a legal representative who distributes property without one is personally liable for the unpaid amounts, up to the value of the property distributed.

A lawyer or accountant can confirm which rules apply to your family's facts and help the estate trustee avoid costly mistakes.

Frequently asked questions