Estate Tax Planning for Ontario Families and Business Owners

Under subsection 70(5) of the Income Tax Act, a person is deemed to dispose of their capital property at fair market value immediately before death. Accrued capital gains on investments, cottages, rental properties and private company shares become taxable on the final return. Registered plans such as RRSPs and RRIFs are generally fully included in income unless they pass to a qualifying spouse or, in some cases, a dependent child or grandchild.

Property left to a spouse or common-law partner, or to a qualifying spousal trust, can roll over at cost under subsection 70(6), deferring tax until the survivor's death. The principal residence exemption can shelter the gain on one home per family unit for each year it is designated. Everything else is taxed at the deceased's marginal rates, which can easily reach the top bracket in the year of death.

In Ontario, assets that pass under a will that is probated are subject to Estate Administration Tax. There is no tax on the first $50,000 of estate value, and the rate is $15 for every $1,000 (1.5%) above that. Assets that pass outside the will, such as jointly held property with right of survivorship, registered plans and insurance with named beneficiaries, are generally not subject to probate tax.

Ontario permits multiple wills, so that assets such as private company shares, which may not require probate to transfer, can be dealt with in a secondary will. Joint ownership and beneficiary designations can reduce probate tax but carry legal and family risks, and must be planned carefully.

Each plan is tailored, but common strategies include the following. Every strategy has tax, legal and family consequences, and we explain the trade-offs before you proceed.

Shares of a private corporation create a special risk: the deemed disposition on death taxes the accrued gain, and when the estate later extracts the company's assets, the same value can be taxed again as a dividend. Post-mortem strategies, such as a pipeline or a redemption with a loss carryback, can reduce or eliminate this double tax, but they have timing requirements, including steps that must occur within the estate's first taxation year, and the CRA scrutinizes them closely.

Graduated rate estates, which can exist for up to 36 months after death, have tax advantages for post-mortem planning and charitable gifts. Executors who are not advised about these windows can miss them permanently.

Executors are personally liable for the deceased's unpaid taxes if they distribute estate property without first obtaining a clearance certificate from the CRA. We advise executors on filing the final return and any optional returns, requesting clearance certificates, and responding to CRA audits of the deceased or the estate. Where the CRA reassesses, we act on objections and appeals.

Review your plan after major life events: marriage, separation, the birth of a child or grandchild, a move, a business sale or a significant change in asset values.