There are many misconceptions about what taxes will be owing when someone dies in Ontario. With proper estate and tax planning advice, many people can minimize the taxes payable by their estate. The following is a short overview of the different taxes that may be affect your estate.
ESTATE ADMINISTRATION TAX (EAT)
In Ontario, the Estate Administration Tax (EAT) (commonly known as probate fees), is often payable upon death. This tax is calculated based on the value of the deceased's estate at the time of death. The rate is $15 per $1,000 of the estate value above $50,000. If an estate is less than $50,000, there is no EAT payable.
Whether or not a Certificate of Appointment of Estate Trustee (also known as probate certificate) is needed and the EAT payable depends on what the assets are and how they are held. Assets held jointly with a right of survivorship (important to note: some jointly-held assets, but not all), or those that have designated beneficiaries (including life insurance policies, TFSAs or RRSPs), are not included in the probate process and therefore are excluded from the EAT calculation.
INCOME TAXES ON THE DECEASED'S FINAL RETURN
The deceased's income tax obligations do not end with death. The executor must file a final tax return, or "terminal return." This return accounts for income earned up to the date of death, including employment income, investment income, and capital gains. This can sometimes mean a large tax liability for an estate, especially where there were capital assets or certain registered investments.
1. Capital Gains
Capital gains tax is a tax on the profit (or capital gain) of certain assets (like some types of investments, real estate, stocks, etc.). This tax is triggered when an asset is sold or disposed of. Death is a tax-triggering event, and if the deceased had the relevant assets, capital gains tax will be owing as of the date of their death.
Capital Gains Tax Inclusion Rate:
Up until recently, 50% of a capital gain has been taxable at the marginal tax rate. The proposed change (announced earlier in 2024 but has not yet been passed) would see an increase in the capital gain inclusion from 50% to 66.67%. This increase will only apply to individuals with a capital gain of more than $250,000. There are some exemptions and there are ways to potentially reduce the capital gains tax.
2. RRSPs and RRIFs
Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) are useful investments during your lifetime because they grow on a tax-deferred basis. When one spouse dies and has named their surviving spouse as the beneficiary, the RRSP or RRIF can roll over to the spouse without triggering an immediate tax liability. On the death of the surviving spouse, or if the RRSP or RRIF are left to other beneficiaries, such as adult children, they will be included in the deceased's final income and will be taxed accordingly. These investments, especially when they have large balances, can often see a significant tax burden for an estate.
3. Trusts and Ongoing Tax Obligations
Trusts have their own tax obligations. Income generated by a trust is also taxable, and the trust must file an annual tax return. Proper tax advice from a qualified tax professional should always be sought prior to establishing trusts and trusts can be a good estate planning tool as well.
PLANNING TO MINIMIZE TAX
While taxes are unavoidable when you die, but strategic estate planning can help minimize the tax burden on your estate and ensure that more of your wealth is transferred to your beneficiaries.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
