There is no inheritance tax in Canada and no estate tax. Instead, you are treated as having sold everything you owned at fair market value immediately before death, and the gains are taxed on a final return the executor files. Ontario then charges estate administration tax on the probated estate.
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From $563.87 taxes included
Under section 70(5) of the Income Tax Act, capital property is deemed disposed of at fair market value immediately before death. The accrued gain on a cottage, a rental property, a share portfolio or private company shares is realised in that final year, and half of it is taxable at the deceased's marginal rate. A principal residence is usually sheltered by the principal residence exemption. Nothing else automatically is.
Registered plans are harsher. The full value of an RRSP or RRIF is generally included in income in the year of death — not half, all of it — unless it qualifies for a rollover to a surviving spouse or common-law partner, a financially dependent child or grandchild, or a registered disability savings plan for a qualifying beneficiary. A seven-figure RRIF with no surviving spouse can generate a tax bill that consumes a large share of the estate.
The relief is the spousal rollover. Where capital property passes to a surviving spouse or common-law partner, or to a qualifying spousal trust, it transfers at cost rather than fair market value, and no gain is realised until the survivor sells or dies. It defers the tax; it does not remove it. Planning for the second death is where most Ontario estate tax work actually happens.
The final T1 return is due 30 April of the year following death where death occurred between 1 January and 31 October, and six months after the date of death where death occurred between 1 November and 31 December. If the deceased or their spouse carried on a business, the date moves to 15 June, with the same six-month rule for deaths between 16 December and 31 December. Late filing with a balance owing attracts a penalty of 5% of the balance plus 1% per full month, to a maximum of 12 months.
Beyond the final return, up to three optional separate returns may be available — for rights or things, for income from a testamentary trust, and for a sole proprietorship or partnership with an off-calendar year end. Each separate return gets its own set of graduated rate brackets and, in many cases, its own personal credits. Filing them where they apply is one of the few genuinely free tax savings in an estate.
Income earned after death belongs to the estate and goes on a T3 trust return. For up to 36 months after death, an estate that qualifies as a graduated rate estate is taxed at graduated rates rather than the top rate, can use an off-calendar year end, and has extra flexibility for charitable donations. That designation is made on the first T3 return and is easy to lose by missing the filing.
Ontario's estate administration tax is charged under the Estate Administration Tax Act, 1998 on the value of the estate covered by an application for a certificate of appointment of estate trustee. For applications made on or after 1 January 2020, no tax is payable on the first $50,000, and above that the rate is $15 for every $1,000 or part of $1,000 of estate value. An Estate Information Return must be filed with the Ministry of Finance within 180 calendar days after the certificate is issued.
The tax applies to what goes through probate, which is why so much Ontario planning aims to keep assets out of it: beneficiary designations on RRSPs, RRIFs, TFSAs and life insurance; joint ownership with right of survivorship; multiple wills, so private company shares and personal effects pass under a secondary will that is never submitted for a certificate. Joint ownership with an adult child needs care — the presumption of resulting trust from Pecore v. Pecore means the asset may fall back into the estate anyway, and the transfer is a taxable disposition when it is made.
Before distributing, the estate trustee should obtain a clearance certificate from the CRA confirming all amounts are paid. Distribute without one and the trustee can be held personally liable for tax the estate still owes, with the money already in the beneficiaries' hands. Clearance takes months, so plan an interim distribution with a holdback rather than making beneficiaries wait for everything.
No. An inheritance is received tax-free by the beneficiary. The tax is settled before that, on the deceased's final return and on the estate's T3 returns, so what the beneficiary receives has already borne it. What is taxable is what happens afterwards: income the inherited assets earn once they are yours, and the capital gain when you eventually sell, measured from the fair market value at the date of death, which becomes your cost base. Keep the date-of-death valuation — it is the number you will need years later.
There is no way to avoid the deemed disposition on death other than passing the property to a spouse, and giving it to the children during your lifetime is itself a disposition at fair market value, so it accelerates the tax rather than avoiding it. The workable options are funding the liability with life insurance, spreading the gain by selling to the children over time with a capital gains reserve, using the principal residence exemption on the cottage instead of the house where that produces a better result, or a trust structure. Model the numbers before choosing.
Generally not, if they are structured properly. Property held in joint tenancy with a right of survivorship passes outside the estate, and registered plans and insurance policies with a valid named beneficiary are paid directly, so neither is normally included in the value on which the tax is calculated. The income tax consequences do not disappear, though: an RRSP paid to a named beneficiary is still taxed on the deceased's final return in most cases, meaning the estate bears the tax while a different person receives the money.
Twelve to twenty-four months is common in Ontario for an estate of ordinary complexity. The usual bottlenecks are the certificate of appointment application, valuations for the deemed disposition, and the CRA clearance certificate, which cannot be requested until all returns are assessed. Executors also have to keep in mind that a dependant's support claim or a spousal election under the Family Law Act can be brought within limited periods after death, which is another reason not to distribute the estate early.
Open your file tonight — a licensed Ontario lawyer will confirm everything with you by tomorrow.