Estate Tax in Canada 2025: What It Is & How to Avoid It

How Does the Death Tax Canada 2025 Actually Work?

The death tax Canada 2025 system operates through several interconnected tax obligations that executors must navigate before distributing assets to beneficiaries.

Capital Gains Tax at Death

Non-registered capital assets, including investment properties, stocks, mutual funds, and recreational properties, are subject to capital gains tax. Currently, 50% of any capital gain is taxable and added to the deceased’s income. 

For 2025, this inclusion rate remains at 50% for all capital gains, as the proposed increase to 66.67% for gains exceeding $250,000 has been deferred until January 1, 2026.

For example, if a cottage purchased for $300,000 is valued at $500,000 at death, the $200,000 capital gain results in $100,000 of taxable income. Depending on the deceased’s total income and province of residence, this could trigger taxes ranging from 20% to over 54%.

RRSP and RRIF Taxation

Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) face particularly harsh treatment. The entire fair market value of these accounts must be included as income in the year of death, not just the capital gains, but the full amount. 

On a $500,000 RRIF, up to $250,000 could be payable in taxes depending on the province, as RBC Wealth Management notes.

This creates what experts call a “tax bomb” for estates, where the cumulative effect of registered account inclusion, combined with capital gains, can push the estate into the highest marginal tax bracket.

Estate Administration Tax

Provincial estate administration tax, commonly known as probate fees, adds another layer of cost. In Ontario, estates valued over $50,000 pay 1.5% ($15 per $1,000) on the amount exceeding $50,000. 

For a $1 million estate, this equals $14,250 in probate fees alone. British Columbia charges 1.4% on amounts over $50,000, while Alberta maintains a flat fee structure, maxing out at $525 for estates over $250,000.

Inheritance Tax Canada 2025: Who Actually Pays?

The inheritance tax in Canada 2025 question often confuses Canadians. While there is no tax on money received as inheritance, the deceased’s estate must settle all tax liabilities before any distribution occurs. 

Without a clearance certificate, executors face personal liability for any unpaid taxes. This certificate confirms that all tax obligations have been met and protects both the executor and beneficiaries from future CRA claims. The process typically requires filing all outstanding tax returns, paying assessed taxes, and submitting Form TX19 with supporting documentation.

According to a 2025 IG Wealth Management study, more than half (54%) of Canadians lack an estate plan, despite 76% saying it’s important to ensure their estate is taxed as little as possible. 

How to Avoid Estate Tax in Canada: 6 Strategic Approaches

While you cannot eliminate all death-related taxes, strategic planning can substantially reduce the tax burden on your estate and preserve more wealth for your beneficiaries.

1. Maximise the Spousal Rollover

The spousal rollover provision allows tax-deferred transfers of RRSPs, RRIFs, and capital property to a surviving spouse or common-law partner. Assets transfer at their adjusted cost base, with taxes deferred until the surviving spouse disposes of the assets or passes away. 

This strategy is particularly effective for corporate tax outsourcing and estate services, where married couples can defer significant tax liabilities.

2. Utilise the Principal Residence Exemption

Your primary residence is exempt from capital gains tax upon death, provided it qualifies as your principal residence for all years owned. This exemption can save hundreds of thousands of dollars in taxes, particularly in high-appreciation markets like Toronto and Vancouver. 

Only one property per family unit per year can be designated as the principal residence, making strategic designation crucial for families owning multiple properties.

3. Establish Family Trusts

Family trusts offer powerful estate planning benefits by removing assets from the deemed disposition at death. Assets held in trust avoid both capital gains tax on death and probate fees. 

Trusts also enable income splitting among family members in lower tax brackets, potentially reducing overall family tax liability. However, trusts face complex reporting requirements and ongoing compliance costs, making outsourced accounting essential.

4. Name Beneficiaries on Registered Accounts

Designating beneficiaries on RRSPs, RRIFs, TFSAs, and life insurance policies allows these assets to bypass probate entirely. Direct beneficiary designations transfer assets faster, avoid probate fees, and provide privacy as they don’t form part of the public estate record. 

Ensure beneficiary designations are current and coordinated with your overall estate plan through comprehensive estate advisory services.

5. Consider Strategic Gifting

While Canada has no gift tax, gifting assets during your lifetime can reduce estate size and probate fees. However, gifting appreciated assets triggers immediate capital gains tax at fair market value. The principal residence can be gifted tax-free if it qualifies for the exemption. 

Strategic gifting requires careful tax analysis to balance immediate tax costs against future estate tax savings.

6. Use Life Insurance as a Tax Protector

Life insurance provides tax-free funds to cover estate tax liabilities without forcing beneficiaries to liquidate assets. Many people often ask, “Does Canada have an estate tax?” – while Canada doesn’t have a traditional estate tax, there can still be significant deemed disposition taxes on death. 

A properly structured policy can preserve family cottages, businesses, and investment portfolios that might otherwise need to be sold to pay taxes. Joint last-to-die policies offer cost-effective coverage for married couples, with premiums typically lower than equivalent individual coverage.