What is taxable in an estate?

There is no inheritance tax in Canada, but particular assets in a deceased person’s estate may be subject to taxation while others are exempt. Here’s an overview of what is taxable and what is exempt in a Canadian’s estate:

Taxable Assets

1. Capital property: Cottages, stocks, mutual funds, and rental properties are considered sold at fair market value upon death. Capital gains are 50% taxable and added to the deceased’s final tax return. 1 
2. Registered accounts: The fair market value of RRSPs and RRIFs is included in the deceased’s income and taxed at regular income tax rates.  ² 
3. Non-registered assets: Personal belongings, cars, investments, and business assets are deemed to be sold at fair market value, potentially resulting in capital gains tax. 3a 

Exempt or Tax-Deferred Assets

1. Primary residence: The principal residence exemption may apply, potentially eliminating capital gains tax on the family home. ^3b
2. Assets transferred to a spouse: Many taxes are deferred when a surviving spouse or common-law partner inherits assets, including real estate, investments, RRSPs, RRIFs, and vacation properties.4 
3. Life insurance proceeds: Life insurance death benefits paid directly to named beneficiaries are generally tax-free and exempt from probate.
4. Inheritances: In Canada, money received from an inheritance is not considered taxable income. 5

Life Insurance and Taxation

Life insurance proceeds are typically exempt from taxation and probate in Canada, provided certain conditions are met:

1. Tax-free death benefit: When paid directly to a named beneficiary, life insurance proceeds are not taxable and do not need to be reported as income. Most life insurance amounts, such as financial gifts and inheritances, are non-taxable under the CRA. While you can use the money as income replacement or pay off your mortgage, you don’t need to report the death benefit as additional income on a tax return. 6
2. Probate exemption: Life insurance proceeds can bypass the estate and avoid probate fees by naming a beneficiary, insofar as all your named beneficiaries do not die before you do.7
3. Growth within the policy: Life insurance investments grow on a tax-sheltered basis and are generally exempt from taxation until money is withdrawn. If beneficiaries receive money from interest or dividends generated by the life insurance policy, those amounts may be taxable. Note: ask your insurance specialist about current legislation that may affect taxation.

Situational life insurance tax implications:

1. Estate as beneficiary: When you name the estate beneficiary, the life insurance proceeds may be subject to probate fees and potential creditor claims.
2. Policy surrenders: If you cancel a policy and withdraw the cash value, you may have to pay tax on the earnings.

Capital Gains Tax Implication: Tax The capital gains inclusion rate of 50% has not been increased as of March 2025. The Canadian government had initially proposed to increase the rate from one-half to two-thirds for certain capital gains, but this change has been deferred. 8

Key points regarding the Capital Gains tax rate:

1. Current rate: The capital gains inclusion rate remains at 50% for all taxpayers. 9
2. Deferred implementation: Initially, a proposed increase was postponed from June 25, 2024, to January 1, 2026. 10 
3. Future changes: If implemented in 2026, the new rate would be two-thirds (approximately 66.67%) for:
   • Individual capital gains exceeding $250,000 annually.
   • All capital gains are realized by corporations and most trusts.  11 
   • Note: Mark Carney, now the Liberal Prime Minster of Canada (until an election occurs), has annulled the Capital gains tax increase proposed by Justin Trudeau.
4. Annual threshold: A new $250,000 annual threshold for individuals is planned, allowing them to benefit from the current 50% rate on gains up to this amount. 12

It’s important to note that these changes are still proposals and may be subject to further modifications before implementation. The government has stated its intention to introduce legislation for these changes, but as of now, the 50% inclusion rate remains in effect for all capital gains. 13

In conclusion, while Canada does not have an inheritance tax, proper estate planning is crucial to minimize tax liabilities and maximize the benefits of tax exemptions, particularly for assets like life insurance proceeds. 14

Turbo Tax: 1, 2, 3a, 3b, 4, 5, 8, 9, 14

CRA: 6, 7

Empire Life: 8

Canada.ca: 10, 11, 12, 13