Tax Implications for Estates in Ontario

When someone passes away, families often focus on what the Will says and how the estate will be divided. What is less understood is that taxes can significantly affect what remains for beneficiaries. Understanding how those obligations work helps ensure that more of the estate is preserved for loved ones.

In Ontario, the main tax considerations include the Estate Administration Tax, the income and capital gains that arise at death, and the tax filings required during estate administration. With careful planning, many of these costs can be reduced or deferred.

Taxes Paid by the Estate

A common misconception is that beneficiaries must pay tax on what they inherit. In Ontario, this is not the case. Canada does not impose a separate inheritance tax, and money or property received from an estate is generally not taxable to the recipient.

However, the estate itself may owe taxes before those assets are distributed. The two most common forms are income or capital gains tax and the Estate Administration Tax, often referred to as the probate fee.

When an executor applies for probate, the estate must pay the Estate Administration Tax. The tax is calculated based on the total value of assets that require probate. The first $50,000 of value is exempt, and any amount above that is taxed at $15 for every $1,000 of value. For example, an estate valued at $500,000 would owe approximately $7,000.

Not every asset forms part of the probate estate. Jointly owned property that passes directly to the surviving owner, and assets with named beneficiaries such as life insurance, RRSPs, and TFSAs, generally fall outside the calculation. More detail on what requires probate is available in our post on Understanding Probate in Ontario.

For official information on how this tax is applied, the Ontario Ministry of the Attorney General’s Estate Administration Tax Information Guide provides additional examples and instructions.

Income Tax and Capital Gains at Death

When someone dies, most of their capital property is treated as though it were sold immediately before death at fair market value. This is known as a deemed disposition. If an investment, cottage, or other asset has increased in value, that growth is considered a capital gain and must be reported on the deceased’s final income tax return, called the terminal return.

In most cases, only half of a capital gain is taxable. For example, if a cottage was purchased for $200,000 and is worth $400,000 at the time of death, the $200,000 increase in value would create a $100,000 taxable capital gain. The inclusion rate for capital gains, at the time of publishing, is 50 percent under federal tax law.

Certain exceptions can postpone or reduce the amount of tax owed. Property left to a spouse or common-law partner can usually transfer on a tax-deferred basis, meaning no immediate tax is triggered until the survivor later sells or transfers the property. Some qualified small business shares and family farm or fishing properties may also benefit from special rollover treatment or exemptions.

The principal residence exemption can eliminate or reduce capital gains tax on a home that was the person’s primary residence during ownership. However, if the property was used partly for another purpose, or owned jointly with others, additional calculations may be required.

Registered plans such as RRSPs and RRIFs are also subject to tax at death. The full value of the account is generally included as income on the final return, unless the plan passes to a qualifying beneficiary such as a spouse or financially dependent child or grandchild.

Tax Filings During Estate Administration

Once someone passes away, their financial affairs do not end immediately. Until the executor finishes collecting assets, paying debts, and distributing property, the estate itself is treated as a separate taxpayer. This means that any income earned during the administration period, such as interest, dividends, or rent, must be reported on a T3 Trust Income Tax Return. The executor is responsible for filing these returns and paying any tax that is owed.

If an estate remains open for a long period, income that stays in the estate instead of being distributed to beneficiaries may be taxed at higher rates. Planning distributions carefully can help reduce this cost. Executors should work with an accountant to manage liquidity, pay liabilities, and stay compliant with filing deadlines.

For a closer look at how estate assets are managed in Ontario visit our blog on the matter.

Planning to Reduce Tax Implications for Estates in Ontario

Although it is impossible to avoid tax implications for estates in Ontario entirely, thoughtful planning can help reduce the overall burden. The right approach depends on your circumstances, but the following strategies are commonly used in Ontario:

• Review how assets are owned. Joint ownership can allow assets to pass directly to a surviving owner, avoiding probate, but it can also create risks such as exposure to the joint owner’s creditors or unintended effects on inheritance. It is also important to note that adding your children or sibling on title to property does not mean the property will avoid probate fees. Seek professional legal advice when considering any joint planning.

• Use beneficiary designations. Naming beneficiaries on registered accounts and insurance policies allows those assets to pass outside the estate. Keep designations up to date to reflect your current wishes.

• Consider trusts. Alter ego or joint partner trusts can allow assets to pass during life while deferring tax until the death of the last surviving individual. Testamentary trusts created by a Will can offer income-splitting benefits or protection for certain beneficiaries.

• Include charitable gifts in your Will. Charitable donations made through your estate can create tax credits on the final return and support causes that matter to you. For more on this topic, visit our post on Charitable Giving Through Your Estate.

• Plan for liquidity. Life insurance or savings can ensure that your executor has the funds needed to pay tax and administrative costs without having to sell important assets.

Tax and estate planning often overlap in ways that can be easy to overlook. Even small details, such as how an account is titled or how an asset is transferred, can have significant tax consequences. Executors also face deadlines and technical filing requirements that can quickly become

At E is for Estates, we guide clients through every stage of planning and administration. Our approach focuses on minimizing tax, reducing uncertainty, and ensuring that your wishes are carried out as intended. Thoughtful preparation today can make a meaningful difference for your family tomorrow.

BOILER PLATE: This article is intended for informational purposes only. For personalized advice tailored to your specific circumstance, please reach out to the E is for Estates team.

Erin L. Watson, B.A., JD

Lawyer & Notary Public

E is for Estates