Recently, there has been a story that has been popping up on news feeds around Ontario, where a family was taken by surprise by some of the rules that apply to income taxes and how they are applied to a deceased taxpayer’s terminal tax return. While they were forced to deal with the confusing rules themselves, they are making public what happened to them, and hopefully, we can use their story as a launching point to help others not face the same issue that they did. You can read the story here or here, where it details their story. The ‘Coles Notes’ version is that the storyteller’s mother passed away at the age of 62, and then a few months later, the father also passed away. This sequence of events led to a large income tax bill for the father’s estate, given all of the registered investments and property that he owned. The surviving children were surprised by just how much tax was owing when they settled his estate. Unfortunately, this is not an uncommon situation. All too often, the need for an estate plan is not considered until it is too late, and many people don’t understand how the tax rules are applied when someone dies in Canada. So, in an effort to provide some help in case you run across this article and are worried about how much tax your estate may be liable for, here are some things you can do to help plan for taxes in the future.
In This Article:
- The Certainties of Life
- Understanding the Tax Rules
- What Can You Do to Plan for Your Final Tax Return?
The Certainties of Life
It’s been said before, and it will be said again. This is a concept that dates back to a letter that Benjamin Franklin wrote in 1789 when he stated that ‘In this world nothing can be said to be certain, except death and taxes.’ This was not a lie then, and it remains true today. Everyone pays taxes, and everyone dies. The issue in Canada for many people is that when they die, the terminal tax return that their estate must file is often the most expensive tax bill that they will ever pay. This is because of something known as the deemed disposition rules. In Canada, when a taxpayer dies, they are deemed to have disposed of all of their assets at the fair market value the minute they died. These values are then included as income that you must pay income tax on from your estate. Some items, like your principal residence, are exempt from inclusion, but if you own RRSPs, RRIFs, or multiple pieces of property, you will face a tax bill that can surprise the people who are left behind. In the case of a married couple, some provisions allow for the rollover of taxable assets from a deceased spouse to the surviving spouse without triggering a tax bill, but when the second spouse passes away, that tax bill will be paid then. In the story of Ashley Galea and her family, what happened was her mother’s assets passed on to her father as the surviving spouse, and unfortunately, when he died, the tax bill was large.
Understanding the Tax Rules
When you invest money in an RRSP in Canada, you are making a deal with the government. That deal is that you are taking money that you earned this year and you are putting it into a savings plan where you won’t use it until you retire. The government’s role in the deal is that they give you back the income tax that you paid on the money this year, and they won’t tax the growth in the RRSP account, but when you take the money out in the future, you will pay income tax on it then. In most cases, there is an advantage to the taxpayer here because people typically make less in retirement than they did while working, so the amount of tax they owe is less than what they received as a refund while working. Where this system fails a bit is when someone passes away with a large balance remaining in their registered retirement accounts. In the case of the Galea family, when the father passed away, there was approximately $715,000 in RRSP money. Those ‘deemed disposition’ rules mean that the now deceased father’s estate had to declare all of that money as income for the year he passed away. In Ontario in 2025, that amount of income triggers a tax bill of $338,154 (based on calculators found here). Just over 47% of the RRSP money would need to be paid as income tax.
Now we add in the fact that the family had a cottage property as well. If you recall, the deemed disposition rules allow for no taxable income to apply to principal residences, but if you own more than one property when you die, there will be capital gains tax applied to every property outside of that principal residence. With the Galea family’s story, we see that the final tax bill was $659,126 in tax owing. With my simple math (meaning that because I don’t know the intricacies of the final tax return, I am assuming all of the income was either from the RRSP or capital gains) This means that the tax owing on the capital gain was $320,972. Some backward calculations lead me to the estimate that the capital gain on the cottage was approximately $1,170,000. With capital gains, half of the amount is taxable income, so about $585,000 was added to the income tax calculation for the terminal tax return. This would mean that from the RRSP and the capital gains tax, the total amount of income the father’s estate needed to pay tax on was probably in the area of $1,300,000. At that level, you do pay about 50% in tax, so the end result is that $659,126 tax bill.
The result of all of this is that the family in the story was actually pretty lucky, but that was left out of the ‘consumer alert’ news stories. Sure, the tax bill was significant, but at least there was enough money in the RRSP account to offset the extra taxes due because of the capital gains on the cottage, leaving the children without a lot of cash in hand, but at least they weren’t forced into a situation where they had to sell the cottage simply to pay the taxes owing on the gain. Many people face the reality where they ignore estate planning, and the only option that they have to pay the taxes owing on a cottage property is to sell the cottage. Being able to hold on to that piece of property was a luxury afforded to this family because of the amount of money in the RRSP, not a hardship. Remember, when you see a news story like this, and it ends with someone offering the statement that they are doing this because they want people to know that maybe ‘RRSP’s aren’t the best option for them’, it is simply bad advice from someone upset over their personal situation. At the end of the day, they still have money left over from their parents’ estate. It is in the form of equity in a cottage that they wanted to keep. Had they simply chosen to sell that cottage, they most definitely would have had a substantial amount of money that they ‘inherited’ from their parents’ estate.
What Can You Do to Plan for Your Final Tax Return?
This is a difficult question, mainly because no one knows when their final tax return will be filed. Again, if you looked at that news story but made the change to it where, instead of passing away when they did, the parents lived many years and then passed away with significantly less money in their registered savings, the taxes owing on that cottage would have still been there, but now with less money in the estate to pay them. This means that the children would be forced to face the reality that they would need to find alternative ways to fund that bill if they wanted to keep the cottage. The unknown aspect of when someone will pass away makes planning for the future more difficult, but what we find when we see stories like this one in the news is that it often comes back to a lack of planning. By choosing to seek out solid advice about your entire financial situation while you are alive, you can save your estate a great deal on your final tax return. Be careful if you are working with a financial advisor who is only focused on getting you to put money into a savings plan and doesn’t talk to you about tax efficiency and overall financial planning. Your total financial plan should include estate planning, where you look at options like how to use tools like life insurance to help fund tax bills in the future. Working with an advisor like a member of the team at Strata Wealth & Risk Management, where they have access to tax experts and multiple different financial tools, can make your plan more efficient and allow for more of what you have worked to build to be passed on to future generations.
