How Inheritance Taxation Works in Canada
| What Happens | Who Pays Tax | Tax Type |
|---|---|---|
| Cash inheritance | No one — cash is not taxed | None |
| Stocks/investments inherited | Estate pays on deemed disposition | Capital gains tax |
| Principal residence inherited | No one (principal residence exemption) | None |
| Cottage/rental property inherited | Estate pays on deemed capital gain | Capital gains tax |
| RRSP/RRIF to spouse | No one (tax-free rollover) | None |
| RRSP/RRIF to non-spouse | Estate pays tax on full RRSP/RRIF value | Income tax |
| TFSA inherited | Spouse: tax-free rollover; others: tax-free value at death | None (on value at death) |
| Life insurance proceeds | No one — tax-free to beneficiary if named | None |
| Business inherited | Estate may owe capital gains tax | Capital gains tax |
Deemed Disposition at Death
When someone passes away in Canada, the CRA treats all capital assets as if they were sold at fair market value on the date of death.
| Asset | Cost Base (Example) | FMV at Death | Capital Gain | Tax (at 50% inclusion, 40% marginal rate) |
|---|---|---|---|---|
| Stocks | $50,000 | $150,000 | $100,000 | $20,000 |
| Cottage | $200,000 | $600,000 | $400,000 | $80,000 |
| Rental property | $300,000 | $700,000 | $400,000 | $80,000 |
| Principal residence | $300,000 | $800,000 | $500,000 | $0 (exempt) |
| RRSP ($400,000) | N/A | $400,000 | N/A | $160,000+ (full income inclusion) |
All taxes are paid by the estate before assets are distributed to beneficiaries.
RRSP/RRIF Inheritance Rules
| Beneficiary Type | Tax Treatment |
|---|---|
| Surviving spouse or common-law partner | Tax-free rollover to their RRSP or RRIF |
| Financially dependent child/grandchild (under 18) | Can be transferred to a term annuity to age 18 |
| Financially dependent child with a disability | Can be rolled to their RDSP or RRSP |
| Adult children, siblings, or other beneficiaries | Full RRSP/RRIF value taxed as income on deceased’s final return |
| Estate (no named beneficiary) | Full value taxed on final return; distributed after tax |
TFSA Inheritance Rules
| Beneficiary | Tax Treatment |
|---|---|
| Successor holder (spouse only) | TFSA transfers directly; remains tax-sheltered |
| Named beneficiary (spouse) | FMV at death is tax-free; contributed to their own TFSA as exempt contribution |
| Named beneficiary (non-spouse) | FMV at death is tax-free; any growth after death is taxable to beneficiary |
| Estate (no named beneficiary) | FMV at death is tax-free; growth after death taxable; goes through probate |
Probate Fees by Province
| Province | Probate Fee on $500,000 Estate | Probate Fee on $1,000,000 Estate |
|---|---|---|
| British Columbia | $6,658 | $13,658 |
| Alberta | $525 | $525 (max) |
| Saskatchewan | $3,500 | $7,000 |
| Manitoba | $3,500 | $7,000 |
| Ontario | $7,250 | $14,750 |
| Quebec | $0–$65 (notarial will) | $0–$65 (notarial will) |
| New Brunswick | $2,500 | $5,000 |
| Nova Scotia | $5,578 | $13,078 |
| PEI | $2,000 | $4,000 |
| Newfoundland | $3,000 | $6,000 |
Strategies to Minimize Estate Taxes
| Strategy | How It Helps |
|---|---|
| Name beneficiaries on RRSP/RRIF/TFSA | Avoids probate; spouse beneficiary enables tax-free rollover |
| Joint ownership with right of survivorship | Property passes directly to survivor (bypasses estate) |
| Life insurance | Proceeds are tax-free and bypass the estate if beneficiary is named |
| Principal residence designation | Ensures no capital gains tax on primary home |
| Gift assets while alive | Triggers tax now (capital gains) but may be at a lower rate; reduces estate |
| Family trust | Useful for complex estates; consult a tax lawyer |
| Maximize TFSA during lifetime | TFSA growth is tax-free; successor holder keeps tax shelter |