Financial Planning -> Wills and Estates -> Minimizing tax at death
Minimize Taxes of a Deceased Taxpayer
Deemed Disposition of Capital Assets
There is no "estate tax" in Canada, but when a person dies there is a deemed disposal of any capital property, so any capital gains would be taxed at this time. This would include assets such as principal residences, vacation properties and investments. Any capital gain on the principal residence or cottage might be eliminated by the principal residence exemption. Resulting capital gains net of capital losses would be recorded on the final return for the year of death. Special tax rules apply for capital losses in excess of capital gains for the year of death.
Distribution of Property to Spouse or Spouse Trust
If the deceased taxpayer's property is being distributed to the taxpayer's spouse or to a "spouse trust", then under certain circumstances taxable capital gains, allowable capital losses, recaptures of capital cost allowance, and terminal losses may be deferred. The deceased taxpayer's cost basis for the property would then become the cost basis for the property to the spouse. Thus, any taxable capital gains would be deferred until the property is disposed of by the spouse. Alternatively, by doing an election, the deemed proceeds to the taxpayer can be the fair market value of the property - in some situations this can be more beneficial. See the links at bottom to the T4011 guide for detailed information.
Contribution to RRSP of Surviving Spouse
A deceased taxpayer may contribute to the spousal RRSP of the surviving spouse or common-law partner, depending of course on the age of the spouse and the unused contribution room of the deceased.
Ordinary, or Final Return
More than one tax return may be filed for a deceased taxpayer, allowing the taxpayer's income from the year of death to be split among different returns. One "ordinary" return would be filed for January 1st to the date of death. This is called the final return.
Optional Tax Returns on Death
There are 3 optional tax returns that can be filed as if the taxpayer is "another person". These returns can reduce or eliminate income tax in the year of death, because certain deductions are allowed to be claimed on the ordinary return as well as the optional returns. These optional returns can be filed for income from:
The optional returns are filed using the normal T1 personal tax return forms. These forms can be obtained from the Canada Revenue Agency (CRA) General Income Tax and Benefit Package web page.
CPP or QPP Death Benefit
The Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) death benefit is paid to the estate of the deceased, or may be paid to another person who applies for the benefit, including the person responsible for paying the funeral expenses, the surviving spouse, or next-of-kin of the deceased. The death benefit can either be included as income on the tax return of the recipient for the year in which it was received, or it can be included on the T3 return for the testamentary trust created either by the will of the deceased or by a court order, also on the return for the taxation year in which it is received.
T3 Trust Return
The executor, trustee or administrator may be required to file a T3 return. When certain income is received by the estate after the date of death, it should be reported on a T3 return for the year in which it is received. See CRA's Chart 2 - Income reported on the T3 Trust Income Tax and Information Return.
What to do When Someone Dies - links to resources for Canada and provinces/territories.
Taxation of Trusts and Estates - changes from Federal 2014 Budget
Medical Expense Tax Credit re year of death
Canada Revenue Agency (CRA) ResourcesWhat to do when someone has died - has links to information on the types of returns that can be filed after a person has died, including
- Chart 1 - Returns for the year of death - very useful information!
- T4011 Preparing Returns for Deceased Persons - see Chapter 4 Deemed Disposition of Property for:
- Transfers of capital property to spouse or common-law partner - other than depreciable property
- Transfers of depreciable property to spouse or common-law partner
IT-305R4, Testamentary Spouse Trusts (Archived)
Tax Tip: You may be wise to get advice from a tax professional - your situation may not be as simple as you think it is!
Revised: October 26, 2023
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