Worked Examples and Checklists
Taxes at death in Canada: the final return, deemed disposition, RRSPs, TFSAs and the principal residence
How the CRA taxes a person at death: final return deadlines, deemed disposition, spousal rollovers, RRSPs and RRIFs, TFSAs and the clearance certificate.
Canada has no inheritance tax, but death is a tax event. On the final T1 return, the deceased is treated as having disposed of capital property at fair market value immediately before death, so unrealized gains on a cottage, rental property or shares are taxed; the full value of RRSPs and RRIFs is generally included in income; and the principal residence exemption can shelter the family home. Property left to a spouse or common-law partner (or a qualifying spousal trust) can roll over at cost, deferring the tax until the survivor's death. The final return is due 30 April of the following year for deaths from January to October, and six months after the death for deaths in November or December. The executor should get a CRA clearance certificate before distributing everything.
Part of the worked examples for estates and separation. General information, not tax advice.
Final return deadlines
| Date of death | Final return due (filing and payment) |
|---|---|
| 1 January to 31 October | 30 April of the following year |
| 1 November to 31 December | Six months after the date of death |
If the deceased or their cohabiting spouse carried on a business, the filing deadline for deaths from 1 January to 15 December is 15 June of the following year (six months after death for 16–31 December), but payment is still due on the dates above. Quebec residents also file a Quebec return (TP-1) with Revenu Québec.
Optional returns can reduce tax by using a second set of personal credits and lower brackets: the return for rights or things (for example, unpaid salary or declared but unpaid dividends; due the later of one year after death or 90 days after the final return assessment), the return for a partner or proprietor, and the return for income from a graduated rate estate.
Deemed disposition of capital property
Under the Income Tax Act, at death the deceased is deemed to have sold each capital property at its fair market value. The gain is the value minus the adjusted cost base.
Illustrative example. Marc owned a cottage bought for $150,000, worth $550,000 at his death, and left it to his daughter. Capital gain: $400,000. At the 50% inclusion rate, $200,000 is added to his income on the final return. The daughter's cost for the cottage is $550,000.
The spousal rollover
If capital property passes to a spouse or common-law partner, or to a qualifying spousal trust, it transfers at the deceased's cost, and no gain is reported until the survivor sells or dies. The executor can elect out of the rollover for particular properties, for instance to use capital losses or the lifetime capital gains exemption on qualifying small business shares or farm property.
Principal residence
The principal residence exemption can eliminate the gain on a home designated for each year it was the family's principal residence. A family unit can designate only one property per year after 1981, so if the deceased also owned a cottage, the executor must choose which to shelter for overlapping years. The designation must be reported on the final return (form T2091(IND)).
RRSPs and RRIFs
| Who receives it | Tax treatment |
|---|---|
| Spouse or common-law partner (named beneficiary, or via estate with joint election) | Can be transferred to their RRSP, RRIF or an eligible annuity before the end of the year after death; no tax in the deceased's return |
| Financially dependent child or grandchild with an impairment | Can be rolled into an RDSP or the child's RRSP, subject to conditions |
| Financially dependent minor child or grandchild | Can be used to buy a term annuity to age 18, spreading the income |
| Anyone else (adult children, the estate, a friend) | Full fair market value included in the deceased's income for the year of death |
The trap. When an RRSP names an adult child as beneficiary, the child gets the full value, but the tax is owed by the estate. If the will divides the rest of the estate equally among several children, the others effectively pay the tax on one sibling's RRSP. Where the estate cannot pay, the CRA can collect from the beneficiary.
Illustrative example. A $400,000 RRIF to one son, and a $400,000 house to the daughter under the will. At an illustrative 45% average tax on the RRIF income, about $180,000 of tax is paid from the estate, which is mostly the daughter's house.
TFSAs at death
| Designation | Result |
|---|---|
| Successor holder (only a spouse or common-law partner can be named) | The survivor takes over the TFSA as is; it remains tax-free and does not use their contribution room |
| Beneficiary (anyone, including the spouse) | Value at death is paid tax-free; growth after death is taxable to the beneficiary. A surviving spouse can contribute the payment to their own TFSA as an exempt contribution within the time limit set by the CRA |
| No designation | The TFSA is paid to the estate and may be subject to probate fees |
In Quebec, beneficiary designations on TFSAs and RRSPs generally have to be made in the will unless the plan is an insurance product or annuity; check with the institution.
The clearance certificate
A clearance certificate (requested on form TX19) confirms that all amounts owed by the deceased or the estate to the CRA have been paid or secured. Without it, an executor who distributes property can be personally liable for unpaid tax up to the value distributed. The CRA asks for the final and other returns to be assessed first. Revenu Québec has its own process for Quebec successions.
Graduated rate estate
For up to 36 months after death, an estate that qualifies as a graduated rate estate pays tax at graduated rates on its own income, can choose a non-calendar year-end and has other advantages, including donations flexibility. After 36 months it is taxed at the top rate.
Checklist for the executor
- Tell the CRA the date of death and stop benefit payments.
- Collect slips (T4RSP, T4RIF, T5, T3) for the year of death.
- Get date-of-death valuations for real estate, securities and businesses.
- Decide on spousal rollovers and principal residence designations.
- File the final return and any optional returns on time.
- Request the clearance certificate before the final distribution.
The full first-months list is in the executor's first steps checklist.
FAQ
Do beneficiaries pay tax on what they inherit?
Generally not on the inheritance itself. The tax is settled in the deceased's final return and the estate's returns. Income earned after death on inherited property is the beneficiary's.
Is the CPP death benefit taxable?
Yes, to the estate or the person who receives it, not on the deceased's final return.
Can capital losses on the final return offset other income?
Net capital losses in the year of death and the year before can be applied against other income, subject to limits. Ask a tax professional.
Sources
- Canada Revenue Agency — doing taxes for someone who died: filing deadlines, RRSPs and RRIFs, clearance certificate
- Revenu Québec — returns and certificate for a deceased person in Quebec
- Justice Laws — Income Tax Act, s. 70 (deemed disposition at death)
- Government of Ontario — how registered plans are treated for estate administration tax
