Taxes at death: what your estate actually owes

Canada abolished estate tax in 1972 and replaced it with something quieter and often larger: on the day you die, the Income Tax Act pretends you sold everything.

The deemed disposition

Section 70(5): immediately before death you are deemed to have disposed of every capital property at fair market value. Every accrued gain since purchase becomes taxable income on your final return — the stock portfolio, the rental property, the cottage bought in 1994. (Since 2024–25 changes to inclusion rates were proposed and partly reversed, verify the current inclusion rate with the CRA when the time comes; one-half is the long-standing baseline.)

Your principal residence is exempt — for most estates, the single largest asset passes untaxed. The cottage is not exempt (one property per family per year), and cottage gains since the 1990s are exactly why estates sometimes have to sell the cottage to pay the tax on the cottage.

Registered accounts: the full-inclusion shock

RRSPs and RRIFs are worse than the deemed disposition: the entire balance — not just growth — is included as ordinary income on the final return, unless it rolls over. A $400,000 RRIF can add roughly $170,000–$200,000 of tax at top marginal rates.

TFSAs, by contrast, die clean: no tax on the balance at death.

The rollovers that save most families

The spousal rollover is why the first death in a married couple is usually a non-event for tax. Capital property can pass to a surviving spouse (or spousal trust) at cost — no deemed gain — under s 70(6), and RRSPs/RRIFs roll into the spouse’s own registered plan when the spouse is the designated beneficiary. The tax is deferred to the second death, which is when planning matters most.

Registered accounts can also roll to a financially dependent disabled child’s RDSP, and there are limited rollovers for dependent minor children (into an annuity to age 18).

What the executor files

The final T1 (due April 30 of the following year, or six months after death if later), optional separate returns that can multiply low brackets (“rights or things”), and a T3 for the estate’s own income while it winds up — the estate’s first 36 months as a graduated rate estate enjoy graduated brackets. Then the clearance certificate before distributing, or the executor pays personally. The executor’s full sequence.

For estates with large accrued gains, private companies, or US assets (US estate tax has its own reach), this is accountant-and-lawyer territory — when to get advice.