Understanding what happens to your estate when you pass away
The Good News: No Inheritance Tax
Contrary to what many Canadians believe, there is no inheritance tax in Canada. If you're left money or assets by a loved one, you don't have to share that inheritance with the Canada Revenue Agency (CRA). It's yours to keep.
Similarly, there's no estate tax—the estate itself doesn't have to hand over a portion to the government before distributing funds to beneficiaries.
The Catch: Canada's "Death Tax"
However, Canada does have what financial expert David Chilton calls a "death tax," and it works like this:
The deceased must file a final tax return for the year they pass away. While this sounds straightforward, several assets trigger unexpected tax bills:
Key Tax Triggers
- Registered Accounts (RRSPs and RRIFs): These are fully brought into income, creating a potentially massive tax liability—unless funds are transferred to a surviving spouse
- Tax-Free Savings Accounts (TFSAs): No tax owed; they truly live up to their name
- Non-Registered Investments: Assets are deemed sold at death, potentially triggering taxes on unrealized capital gains
- Principal Residence: Generally exempt from capital gains tax, thanks to the principal-residence exemption
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