Inheritance Tax in Canada: What the Estate Pays at Death

Canada has no inheritance tax, and beneficiaries generally don’t report what they receive. The CRA lists most gifts and inheritances among amounts you don't report or pay tax on, so receiving one isn't income to you, but income earned on it afterwards, such as interest, is taxable. The tax is paid earlier, on the deceased person’s final return, before the estate is distributed. Its biggest items are the deemed sale of capital property at death and the value of any RRSP or RRIF that doesn’t pass to a qualifying survivor. Some provinces add a probate fee.

This page covers the estate’s side. What a beneficiary owes later, on the income and gains from what they inherit, is on tax implications of receiving an inheritance. Both are part of the investment tax hub.

What the final return includes

Deemed disposition at death

The rule is subsection 70(5) of the Income Tax Act. For property that doesn’t pass to a spouse, the conditions that apply:

• Capital property the person owned is considered sold at fair market value immediately before death, and the gain or loss is reported on Schedule 3 of the final return.
• For depreciable property used to earn rental or business income, the deemed sale can also mean recapture of capital cost allowance or a terminal loss.

The same subsection sets the cost for whoever receives the property: they are deemed to acquire it at the time of death at a cost equal to its fair market value immediately before the death. The gain up to death is taxed once, on the final return, and the beneficiary is taxed only on growth after that.

The spousal rollover

The spousal rollover in section 70 of the Act sets aside the deemed sale for property that passes to a surviving spouse or common-law partner, as long as the deceased was also resident in Canada immediately before death. The conditions and options, from the CRA’s capital gains at death page:

• Property transferred to a surviving spouse or common-law partner who is resident in Canada at the time of death passes on a tax-deferred basis: the gain or loss is postponed until the spouse or partner sells, or is deemed to sell, it.
• For the rollover, the property must be locked in for the spouse or partner no later than 36 months after the death.
• If the property won't be locked in within 36 months, the legal representative can ask the director of their Tax Services Office for an extension, as soon as possible before the period ends.
• The legal representative can elect out of the rollover in the final return, property by property, so that property passes at its fair market value.
• A testamentary spousal or common-law partner trust qualifies if it is resident in Canada, the property is locked in for it within 36 months of the death, the spouse or partner is entitled to all of its income, and no one else can receive or use its income or capital during their lifetime.

With the rollover, the survivor or trust takes over the deceased’s cost: the adjusted cost base, or for depreciable property the lesser of its capital cost and its cost amount.

Farm and fishing property has a similar rule for children:

• Property used in a farming or fishing business and left to a child can also be transferred on a tax-deferred basis.
• For that, the child must have been resident in Canada immediately before the death, the property must be locked in for the child within 36 months, and the deceased, their spouse or partner, or a child or parent of the deceased must have used it principally in farming or fishing on a regular and ongoing basis.

Gifts made before death are covered on gifting money to family.

RRSPs and RRIFs

The CRA says it considers a deceased annuitant to have received, immediately before death, an amount equal to the fair market value of all the property in the plan, and that amount is included in income for the year of death. The exceptions: At death, an RRSP is taxed on the final return unless it goes to a qualifying survivor: a spouse or common-law partner (who can roll it into their own RRIF or an annuity at any age, or into their own RRSP if 71 or younger at the end of that year), a financially dependent child or grandchild with an impairment (RRSP, RRIF or RDSP), or another financially dependent child or grandchild (an annuity to age 18).

A RRIF can also continue in the survivor’s name: Only a spouse or common-law partner can be a RRIF's successor annuitant: named in the RRIF contract or the will, they take over the RRIF and its payments; if not named, they can still become the successor if the legal representative consents and the carrier agrees. What happens to an RRSP when you die and what happens to a RRIF when you die cover the forms and slips.

TFSAs

A TFSA’s value at death is not taxed on the final return. How it passes depends on the designation:

• Successor holder. Only a spouse or common-law partner can be named successor holder (Quebec doesn't recognize the designation, except for TFSA annuity contracts); they become the new holder of the same TFSA, which stays tax-free, without using their own contribution room.
• Designated beneficiary. A designated beneficiary (anyone you name; Quebec doesn't recognize the designation on deposit or trust TFSAs) receives the TFSA's value at death tax-free; earnings after the date of death are taxable to them. A surviving spouse or partner named as beneficiary may be able to contribute the payment to their own TFSA as an exempt contribution.

What happens to a TFSA when you die has the details.

The family home

The gain on a home is tax-free for each year you designate it as your principal residence: you or your family must have ordinarily lived in it that year, a family can designate only one home a year, and you report the sale on Schedule 3 and Form T2091; the exempt share is the years designated (while resident in Canada), plus one if you were resident in the year you bought it, divided by the years owned. At death, the legal representative makes the designation: Some or all of the gain on a principal residence may be exempt, but it must still be designated on the final return (Schedule 3 and Form T1255). A family that also owns a cottage therefore chooses which of the two to designate for each year. The principal residence exemption guide explains the designation.

Probate fees

Probate fees are provincial and are charged on the value of the estate that goes through probate, separately from income tax. Two examples, computed from each province’s current schedule:

Probate fees by province covers the other provinces and what counts toward the estate’s value, and avoiding probate on registered accounts covers beneficiary designations.

Filing the final return and paying the tax

The CRA’s filing deadlines for the final return:

The CRA notes that payment of any balance owing must still be made on or before the payment due date, which doesn’t move with the later self-employed filing date. If the person dies early in the year, on or before the filing due date for the previous year’s return, and hadn’t filed that return, it is also due 6 months after the date of death, with any balance owing.

Before distributing the estate, the legal representative can ask the CRA for a clearance certificate on Form TX19. The CRA says that a representative who distributes assets without one, while tax is still owing, is personally liable for unpaid amounts, up to the value of the assets distributed (clearance certificates). Once the representative has a certificate, the CRA says the liability rests on the estate, trust, corporation, beneficiaries, or other people who have received the distributed assets.

Charitable gifts in the year of death

On the final return, the CRA’s donations rules for someone who died allow a claim of up to 100% of the deceased’s net income, covering gifts made in the year of death plus unclaimed gifts from the 5 years before. Any excess can be claimed on the return for the previous year, up to 100% of that year’s net income.

Gifts made by will, and designation donations (RRSP, RRIF, TFSA or life insurance proceeds paid directly to a charity because it is the named beneficiary), are treated differently. The CRA says these estate donations are deemed to be made by the estate, at the time the property is transferred to the charity, so the estate can claim them on its T3 return. They can be carried back to the final return (or the year before the death) only if all three of these conditions are met:

• the estate meets all the requirements of a graduated rate estate except the 36-month time limit;
• the gift is made within 60 months after the date of death; and
• the donated property (or the proceeds) was acquired by the estate on and as a consequence of the death.

Ways families reduce the tax at death

Each has trade-offs (control, flexibility, who ends up with what), and a will that matches the beneficiary designations matters as much as any of them.

Related pages

• Investment tax hub
• Tax implications of receiving an inheritance
• Gifting money to family in Canada
• Capital gains inclusion rate
• Probate fees by province
• What happens to an RRSP when you die
• What happens to a TFSA when you die
• Principal residence exemption guide
• How to make a will in Canada
• Family trusts in Canada