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This blog is for information purposes only and should not be taken as legal advice. With changing tax laws, many tax-saving strategies quickly lose their validity. For tax advice, consult one of our tax professionals.
Among the most significant taxes triggered upon death in Canada is the capital gains tax. This tax applies to the increase in the value of the deceased person’s capital assets, from when they acquired them to their fair market value immediately before death.
While it’s the beneficiaries face the deduction caused by this tax, theoretically, the deceased himself pays this tax. Because none of the deceased’s assets devolve to the heirs unless the Canadian Revenue Agency (CRA) receives this tax.
Most of the assets owned by the deceased, barring a few, are subject to this tax.
The following is a detailed discussion on key aspects of capital gains tax as it relates to an estate:
Brief explanation of capital gains tax
Capital gains tax is a levy imposed on the profits from the sale or deemed sale of a capital asset. The taxable amount is generally the difference between the asset’s sale price (or fair market value) and its original purchase price, known as the adjusted cost base (“ACB”) subject to the inclusion rate which is currently at 50%.
At death, a taxpayer is deemed to have disposed of all capital assets at fair market value immediately before death. For example, if the deceased’s own shares’ value was $1,500 which was originally purchased for $1,000, the $500 capital gain would be subject to tax on the final tax return. This deemed disposition can result in capital gains tax becoming payable by the estate.
Importance of estate planning in managing capital gains tax
Estate planning plays a critical role in managing and potentially minimizing capital gains tax upon death. Without proper planning, the deemed disposition of assets at fair market value can result in significant tax liabilities for the estate. However, various strategies can be used to reduce or defer this tax burden.
These may include spousal rollovers postmortem pipeline methods.
Types of capital assets subject to tax
Upon death, most of the assets of the deceased are deemed to be disposed of at fair market value, which may trigger capital gain tax. Some of those are detailed below:
Real Estate
All immovable property including undeveloped land, principal residences, vacation properties (e.g. cottages or villas), and rental or investment properties, are subject to capital gains tax although a principal residence may be exempt.
Registered Plans: RRSPs and RRIFs
Registered Retirement Savings Plans (“RRSP”) and Registered Retirement Income Funds (“RRIF”) are tax-deferred accounts. On death, the full value of these accounts is included in the deceased’s income for the year of death unless they are rolled over to:
- A surviving spouse or common-law partner
- A financially dependent child or grandchild (conditions apply)
Other assets subject to capital gains tax:
- Personal-Use Property (Includes items like artwork, jewellery, boats, and collectibles.) Subject to limits.
- Business Assets
- Sale of depreciable property (e.g., equipment, buildings) may trigger recapture and/or capital gain.
- Sale of goodwill or intangible assets is also subject to capital gains tax.
- Investments
- Cryptocurrency (treated as a commodity for tax purposes).
- Units in mutual funds, ETFs, and other investment vehicles.
- Stocks and Bonds (Includes publicly traded shares, private company shares, and debt instruments.)
Calculation of Capital Gains Tax in Canada
To calculate capital gains tax in Canada, the Canada Revenue Agency (“CRA”) uses the following key parameters:
- Proceeds of Disposition:
The total amount you received (or are deemed to have received) from selling or disposing of the asset. - Adjusted Cost Base (ACB):
The original purchase price of the asset, plus any associated costs to acquire it (e.g., legal fees, improvements, commissions). Think of it as the value when you become the owner. - Expenses Incurred to Sell the Property:
Includes selling commissions, legal fees, and other costs directly related to the sale.
The Canada Revenue Agency (CRA) uses the following formula to calculate capital gains:
The proceeds of disposition – (The adjusted cost base + Expenses incurred to sell the property)
Current Capital Gains Taxation (As of April 2025)
Currently, 50% of the capital gain is included in taxable income. That means only half of the profit from the sale is subject to tax, which is added to your overall income and taxed at your marginal tax rate.
Recent changes or updates in Canadian capital gains tax laws
Upcoming Changes – Capital Gains Inclusion Rate
As of January 31, 2025, the Government of Canada announced a deferral in the implementation of the increase to the capital gains inclusion rate. The new inclusion rate, which was initially set to increase from 50% to 66.67% on June 25, 2024, has now been postponed to January 1, 2026. This means that, for the time being, the 50% inclusion rate remains in effect for all capital gains realized on or after June 25, 2024.
Strategies to Minimize Capital Gains Tax
I. Spousal Rollovers
Spousal rollovers are an effective way to defer taxes that are available only to Canadian-resident spouses or common-law partners. Capital gains tax is deferred until the property is sold or the surviving spouse dies.
II. Careful Selection of Principal Residence
Under the Principal Residence Exemption (“PRE”), only one single residence can be designated as a principal residence for each year of ownership with a “plus one year” benefit. When designated, any capital gain on that property is fully exempt from tax upon sale or deemed disposition (such as at death). Therefore, as part of estate planning, it is advisable to strategically designate the property expected to generate the highest capital gain as the principal residence. This maximizes the benefit of the exemption and minimizes potential capital gains tax for your heirs.
A tax professional can assist in selecting the most tax-efficient property as your principal residence, especially where multiple properties (e.g., cottage, rental, or family home) are owned.
III. Pipeline methods
The postmortem pipeline strategy is a tax planning method used to avoid double or triple taxation when a private corporation owner dies. Instead of paying dividend tax to extract corporate value, the estate reorganizes the shares into a new corporation and receives a promissory note equal to the fair market value of the shares at death.
After that, the private company repays the note tax-free, allowing the estate to extract funds without triggering the dividend tax rate.
IV. Charitable Donations
Donating appreciated assets to charity can be a tax-efficient strategy. When a building is sold, any increase in value since purchase is subject to capital gains tax (generally, 50% of the gain is taxable).
However, if the building is donated to a registered charity, you may not have to pay tax on the capital gain, or it may be reduced, depending on the type of donation. The fair market value (FMV) of the donated building is treated as a charitable gift.
This generates a donation tax credit (individuals) or deduction (corporations), which can significantly reduce your taxes.
For individuals, the federal credit is 15% on the first $200 and 29% (or 33%) on amounts above that, with an additional provincial credit. If capital cost allowance (“CCA”) has been claimed on the building, recapture of depreciation might apply on sale. On a donation, this may be reduced or deferred if structured correctly.
V. Strategic Planning by the executor
An executor plays a crucial role in managing the estate’s tax burden. One effective strategy involves offsetting capital gains on certain assets with capital losses on others. By realizing these losses before the final tax return is filed, the executor can minimize the estate’s overall capital gains tax, preserving more value for beneficiaries.
VI. Use of Trusts
Trusts are powerful estate planning tools that can significantly reduce or defer capital gains tax. These trusts can offer immediate tax benefits, long-term deferral of gains, and even remove assets from the taxable estate, aligning financial objectives with philanthropic or legacy goals.
Conclusion
Capital gains tax can substantially erode the value of an inherited estate. However, with thoughtful planning, including spousal rollovers or strategic use of trusts, it is possible to minimize or defer tax liabilities. Given the complexity and evolving nature of tax legislation, it’s essential to consult with a qualified tax advisor to ensure your plan is both tax-efficient and aligned with your family’s long-term goals.