Estate Planning in Canada: Avoiding Unnecessary Taxes for Your Heirs

Estate planning is about more than just deciding who will inherit your assets. In Canada, when someone passes away, the Canada Revenue Agency (CRA) treats their assets as if they were sold at fair market value the day before death. This is called a “deemed disposition”, which can create a significant tax bill for your surviving loved ones if your assets have appreciated over time.

Without proper planning, your heirs or executor may be left scrambling to deal with complicated tax issues, unexpected capital gains, and probate costs. This article walks you through the tax implications of estate planning in Canada, using simple examples to help you understand what’s at stake and how you can plan wisely.

What Happens to Your Assets at Death?

When a person dies, most of their assets are “deemed” to be sold at market value, even if they aren’t actually sold. This includes:

1. Your home (unless it qualifies for the principal residence exemption)
2. Registered accounts like RRSPs and RRIFs
3. Tax-Free Savings Accounts (TFSAs)
4. Personal property (cars, artwork, jewelry)
5. Non-registered investments (stocks, bonds, ETFs, cryptocurrency)
6. Real estate investments
7. Shares of a private corporation or small business

If the market value of these assets is higher than what you originally paid, the “gain” is taxable, which will be added to your final income tax return.

For example, let’s say you bought a stock portfolio for $50,000 20 years ago, and it’s worth $300,000 when you die. That’s a $250,000 gain. According to the capital gain inclusion rule,half of that ($125,000) is taxable. If your marginal income tax rate is 50%, your estate owes about $62,500 in taxes.

The Spousal Rollover Rule

The good news is that if you leave assets to a surviving spouse or common-law partner, those assets can transfer at their original cost instead of market value. This is called the spousal rollover.

The rollover means no immediate tax is payable. Instead, the capital gain is deferred until your spouse eventually sells or passes away, which can make a huge difference in preserving wealth for your family.

But, this only applies if you’ve clearly documented your intentions in a valid will. Without one, assets may not qualify for the rollover and your estate could face an unnecessary tax bill.

Passing Assets to Children or Grandchildren

If you don’t have a surviving spouse – or you choose to leave assets directly to children or grandchildren – the spousal rollover doesn’t apply. This means the deemed disposition rules kick in, and your estate will have to pay taxes on capital gains.

For example, if you leave a cottage, business, or large investment account to your kids, the estate has to settle the tax bill first before the assets are transferred. This is why executors need to be prepared; taxes are due whether or not the heirs plan to sell the assets!

Probate Tax Considerations

In addition to income taxes, your estate may also have to pay probate fees (sometimes called estate administration tax). Probate is the legal process of validating a will, and the cost varies by province.

For example, Ontario charges 1.5% of the estate’s value above $50,000, British Columbia charges a sliding scale, topping out at 1.4%, while Alberta charges flat fees that are generally much lower.

Some people try to avoid probate by adding children to the title of their property while they’re alive. This can backfire. For example, suppose you bought a house in 1990 for $100,000, and in 2025 it’s worth $800,000. You add your daughter to the title. When you pass away in 2035, the house is worth $1.2 million. She owns 50%, so her share of the $800,000 gain ($400,000) is taxable. Half of that ($200,000) is included in her income, and at a 53% rate, she owes $106,000 in tax.

This tax bill could have been avoided if the house remained solely in your name, since the principal residence exemption would cover the gain. In trying to dodge a few thousand dollars of probate tax, your family might end up paying six figures in unnecessary income tax.

How Different Assets Are Taxed at Death

Principal Residence

If the property you owned was your home and you lived in it for all the years you owned it, the capital gain on the sale at death is fully exempt from tax. However, if you owned more than one property, such as a cottage in addition to your house, only one property can be designated as your principal residence for any given year. To claim this exemption, a Principal Residence Designation (Form T2091) must be filed on the final tax return.

RRSPs and RRIFs

At death, the entire value of your RRSP or RRIF is generally included in your income for that year, which can create a significant tax liability. This tax can be deferred if the account is transferred, or “rolled over,” to a surviving spouse. However, if the RRSP or RRIF is left to children or other heirs, the value of the account becomes taxable income for the estate.

For example, if your RRSP is worth $500,000, the estate could face a tax bill of over $200,000, depending on the marginal tax rates that apply.

TFSAs

Tax-Free Savings Accounts (TFSAs) are not taxed at death, but the rules differ depending on who inherits the account. A surviving spouse can inherit the TFSA and maintain its tax-free status, so long as Form RC240 is filed within 30 days of the transfer to a spouse.

If the TFSA is left to children or other beneficiaries, withdrawals remain tax-free, but any growth in the account that occurs after the date of death may become taxable. It’s important for the beneficiary to transfer the money out of the TFSA within the rollover period, which ends on December 31 of the year following the year of death.

Non-Registered Investments (Stocks, ETFs, Crypto)

For non-registered investments such as stocks, ETFs, or cryptocurrencies, capital gains tax applies on death. What’s important to note is that the unrealized gain is taxed.

For example, if you bought a stock portfolio worth $50,000 that is later worth $300,000 upon death. Half of the $250,000 unrealized gain would be taxed, and if you’re in the 50% tax bracket, the tax bill for this stock portfolio would be $125,000.

Because of this, careful record-keeping is essential, especially for crypto assets and foreign investments, where cost bases can be more complex to track.

Private Business Shares

When private company shares are transferred to a surviving spouse, the tax is deferred. However, if the shares are passed to children, a capital gain is triggered at death. Since many shares have a very low cost base, this can result in large taxable gains.

However, if the shares qualify as Qualified Small Business Corporation (QSBC) shares, the estate may be able to use the Lifetime Capital Gains Exemption (LCGE), which is currently $1.25 million. Because business valuations are complex, a professional valuation is usually required to determine fair market value at the time of death.

Rental Properties / Real Estate Investments

Rental properties and other real estate investments are also subject to capital gains tax, unless they are transferred to a spouse, in which case the tax is deferred. The property must be valued at its fair market value, typically established by a certified appraiser.

In addition to capital gains, any depreciation (known as Capital Cost Allowance, or CCA) that was previously claimed on the property must be “recaptured” and added back into income in the year of death.

The Executor’s Responsibilities

Your executor has the legal responsibility to file a final tax return on your behalf. This includes:

• Reporting all deemed dispositions.
• Claiming the principal residence exemption.
• Electing RRSP/RRIF rollovers where applicable.
• Filing any special forms (e.g., T2091 for residence, T2019 for RRSP rollover).
• Paying any taxes owing before distributing assets.

Without proper planning, executors can be overwhelmed, and heirs may face delays or unexpected tax bills.

The Final Tax Return

When someone passes away in Canada, their executor is responsible for filing a final tax return, also known as the “terminal return.” This return includes all income earned by the deceased from January 1 of the year of death up to the date of passing, plus any deemed dispositions of assets (such as real estate, business shares, or investments) that trigger capital gains.

Certain registered accounts like RRSPs or RRIFs may also be fully taxable unless transferred to a spouse. The final return ensures the CRA receives any taxes owed before the estate is distributed to heirs, and in many cases, additional optional returns can be filed to report specific types of income separately, which may lower the overall tax bill. Proper planning and professional advice can make this process smoother and help minimize the tax burden on the estate and its beneficiaries.

Why Professional Advice Matters

Estate planning is not just about writing a will. Small mistakes, like adding a child to a property title or failing to file the right forms, can create huge tax costs for your family.

Working with an accountant and estate lawyer ensures that you minimize capital gains and probate costs, spousal rollovers and exemptions are used correctly, your executor has a clear plan to follow, and your children or heirs aren’t burdened with unnecessary taxes.

The key is to plan early and get the right advice. With the help of professionals, you can reduce taxes, protect your wealth, and ensure your family inherits more of what you’ve worked so hard to build.