Taxes When Someone Dies in Ontario: Deemed Disposition and Probate Tax
Ontario has no inheritance tax and no estate tax. A beneficiary does not pay tax on receiving an inheritance. What arrives instead is three separate charges, each with a different base: the provincial Estate Administration Tax on the value of the estate, federal and provincial income tax on the deceased's final return driven largely by the deemed disposition rule, and income tax on whatever the estate itself earns before it is wound up. An estate can owe a great deal of one and almost nothing of another. Who ultimately bears each charge is a separate question, and with registered plans the answer is not always the estate.
What Are the Three Taxes After a Death in Ontario?
| Estate Administration Tax | Income tax on the final return | Income tax on the estate | |
|---|---|---|---|
| What it taxes | Value of estate assets passing through probate | Income and accrued gains up to the date of death | Income earned by the estate after death |
| Who charges it | Ontario Ministry of Finance | Canada Revenue Agency | Canada Revenue Agency |
| Rate | 1.5% above a $50,000 exemption | The deceased's marginal rates | The estate's rates |
| Return | Estate Information Return | Terminal T1 | T3 trust return |
| Who pays | The estate, as a deposit on filing | The estate, subject to the registered plan exception below | The estate |
None of these is a tax on inheriting. A beneficiary receiving a cash legacy reports nothing, and in the ordinary case all three charges are settled from estate assets before beneficiaries receive anything.
Registered plans are the exception, and it matters. Where an RRSP or RRIF passes directly to a named beneficiary, the value is included in income on the deceased's final return, so the liability appears on the estate's return. Section 160.2 of the Income Tax Act makes the recipient of the plan jointly and severally liable with the deceased for the portion of the tax attributable to what they received. The estate commonly bears the tax in practice, but the Canada Revenue Agency also has recourse against the person who received the plan, and is not obliged to pursue the estate first.
How Does the Estate Administration Tax Work?
It is charged on the value of the assets that pass through the estate. There is no tax on the first $50,000. Above that, the rate is $15 for every $1,000 or part of $1,000. That works out to 1.5% on everything over the exemption.
The value is rounded up to the nearest $1,000 before the calculation. Ontario's own worked example runs an estate of $239,250 as though it were $240,000, producing $2,850. This step is skipped by a good many online calculators. It affects the tax calculation only. The underlying assets are still reported at supportable date of death values.
Several categories are excluded from the calculation: assets held jointly that pass by survivorship, registered plans and insurance with a named beneficiary, real estate located outside Ontario, and the Canada Pension Plan death benefit. Registered encumbrances against Ontario real property, such as a mortgage or a lien, are deductible. Funeral expenses, legal fees, credit card balances, lines of credit and vehicle debt are not.
| Estate value | Estate Administration Tax |
|---|---|
| $50,000 | $0 |
| $100,000 | $750 |
| $250,000 | $3,000 |
| $500,000 | $6,750 |
| $1,000,000 | $14,250 |
| $2,000,000 | $29,250 |
The tax is paid as a deposit when the application is filed and becomes the tax when the certificate issues. Our Estate Administration Tax guide explains the calculation in full, and there is a calculator on our homepage running on current rates.
What Is the Deemed Disposition Rule?
Section 70(5) of the Income Tax Act treats the deceased as having sold every capital property immediately before death, for proceeds equal to its fair market value at that moment. No sale takes place. The rule exists so that gains which accrued during a lifetime are taxed at some point rather than never. Whoever acquires the property is treated as having acquired it at that same fair market value, so the gain is not taxed twice.
One half of a capital gain is taxable, and that taxable half is added to the deceased's income on the terminal return, where it is taxed at the deceased's marginal rates. A large accrued gain can therefore push a final return into the top bracket in a year when the deceased may have earned very little.
Registered plans are treated differently and more harshly. The value of an RRSP or RRIF at the date of death is generally brought into income in full on the final return, not at the one half rate that applies to capital gains, unless it qualifies for a rollover to a spouse, a common-law partner, or in defined circumstances a financially dependent child or grandchild.
The principal residence exemption still applies. A home that qualified as a principal residence throughout the period of ownership generally produces no taxable gain on the deemed disposition, which is why a family home can carry a large Estate Administration Tax charge and no income tax at all.
What Is the Spousal Rollover?
Section 70(6) of the Income Tax Act defers the gain where capital property passes to a surviving spouse or common-law partner, or to a qualifying spousal trust. Instead of a deemed sale at fair market value, the property transfers at the deceased's adjusted cost base. Nothing is taxed on the final return. The gain travels with the property and is taxed when the survivor eventually disposes of it or dies.
The property generally must vest indefeasibly in the spouse, partner or trust within 36 months of the death. If the legal representative applies in writing to the Minister within that period, the Minister may allow a longer period that is reasonable in the circumstances. An estate that stalls without making that written application can lose the deferral.
The rollover is not always the better answer, and the legal representative can elect out of it on a property by property basis. Where the deceased died early in the year with little other income, or held unused capital losses, or where the survivor is likely to face higher rates later, deliberately triggering some gain on the final return can produce a lower total tax across both estates. This is an accounting decision that should be made before the return is filed, not after.
When Is Each Return Due?
The Estate Administration Tax deposit is paid when the probate application is filed.
The Estate Information Return is due within 180 calendar days of the certificate being issued, filed with the Ministry of Finance, and it is due even where the estate is under $50,000 and no tax is payable.
The terminal T1 return is due April 30 of the following year where the death occurred between January 1 and October 31. Where the death occurred between November 1 and December 31, it is due six months after the date of death. Later dates can apply where the deceased or their cohabiting spouse or partner carried on a business.
The prior year's return, if it was never filed and the death occurred between January 1 and April 30, is due six months after the death.
The estate T3 return is due 90 days after the estate's tax year end. A graduated rate estate may choose a first tax year end up to one year after the date of death. An estate that is not a graduated rate estate generally has a December 31 year end.
A Worked Example
Consider an Ontario estate of $850,000: a principal residence worth $600,000, a cottage worth $200,000 that was bought for $50,000, and $50,000 in a bank account.
Estate Administration Tax. The estate value above the exemption is $800,000. At $15 per $1,000, the tax is $12,000.
Income tax on the final return. The principal residence generally produces no taxable gain. The cottage has an accrued gain of $150,000, of which one half, $75,000, is added to the deceased's income for the year of death. The bank account produces no gain at all.
The comparison. The residence carries two thirds of the probate tax and none of the income tax. The cottage carries a quarter of the probate tax and all of the income tax. The two charges are not measuring the same thing, and an estate plan aimed at one of them may do nothing about the other.
Where This Goes Wrong
Assuming Ontario taxes inheritances. It does not. A beneficiary receiving a cash legacy reports nothing. Income earned on the money after they receive it is theirs to report, but the legacy itself is not income.
Treating the two taxes as one number. Reducing the probate tax by moving assets outside the estate does not reduce the deemed disposition. Putting an adult child on title to a cottage can lower the Estate Administration Tax and trigger an immediate capital gain, along with the evidentiary problems that come with joint ownership.
Distributing before the tax position is settled. A legal representative who distributes without a clearance certificate or an adequate holdback can be personally liable for unpaid amounts, up to the value of the property distributed. Where a registered plan went directly to a named beneficiary, the estate trustee should also know that section 160.2 of the Income Tax Act gives the Canada Revenue Agency a claim against that recipient, which can change how the burden is allocated in practice.
Missing the Estate Information Return. It is a separate filing from the tax deposit, it goes to the Ministry of Finance rather than the Canada Revenue Agency, and the 180 day clock runs from the certificate.
If the estate is holding property with a large accrued gain, the sequence of decisions matters more than any single one of them. You can book a free call to work through it before returns are filed.
Frequently Asked Questions
Does Ontario have an inheritance tax?
No. Neither Ontario nor Canada charges tax on receiving an inheritance. What exists is the provincial Estate Administration Tax on the value of the estate, and income tax payable by the deceased and by the estate. These are generally liabilities of the deceased or the estate rather than taxes imposed because someone receives an inheritance, although assets such as registered plans can pass directly to a beneficiary and special liability rules can then apply to the recipient.
What is deemed disposition at death?
Section 70(5) of the Income Tax Act treats a person as having sold all their capital property immediately before death at fair market value. Accrued gains become taxable on the final return even though nothing was actually sold, and one half of each gain is included in income.
Is the estate administration tax the same as capital gains tax?
No. The Estate Administration Tax is provincial, charged on the value of the estate assets passing through probate at 1.5% above the $50,000 exemption. Capital gains tax is federal and provincial income tax charged on the growth in value of property, not on the value itself.
Do RRSPs and RRIFs get taxed at death?
Generally the full date of death value is included in income on the final return, rather than half of it as with a capital gain. A rollover can defer this where the plan passes to a spouse or common-law partner, or in defined circumstances to a financially dependent child or grandchild. A registered plan is excluded from the Estate Administration Tax calculation where a valid designation causes it to pass outside the estate. A plan with no effective designation, or one payable to the estate, forms part of the estate and is included.
When is the final tax return due for someone who died in Ontario?
For a death between January 1 and October 31, the terminal return is due April 30 of the following year. For a death between November 1 and December 31, it is due six months after the date of death. Different dates can apply where the deceased or their spouse or partner carried on a business.
Can the estate defer paying the estate administration tax?
The tax is normally paid as a deposit when the application is filed. Where the estate cannot access funds to pay it, section 4(1) of the Estate Administration Tax Act, 1998 allows a court to order that payment be deferred. This is a court order, not an administrative concession, and it has to be applied for.
This article provides general information about Ontario law and is not legal advice. Speak with a lawyer about your specific circumstances.
