Written by Ron Cooke, President & Founder of Strategic Wealth Protection Partners in Ontario
How Do I Avoid Capital Gains Tax on Inherited Property in Canada?
Inheriting property in Canada can come with significant tax implications, particularly capital gains tax.
Understanding how these taxes work and using strategic estate planning can help minimize or even eliminate unnecessary costs.
How is inherited property taxed in Canada?
Canada does not have an inheritance tax, but when a person passes away, their estate is responsible for paying any taxes before distributing assets.
If the inherited property was a principal residence, it is tax-free. However, if it was a rental, vacation home, or investment property, the estate must pay capital gains tax on any increase in value from the time the deceased acquired it until their death.
The beneficiary may also owe capital gains tax if the property appreciates in value after they inherit it and later sell it.
Do you pay capital gains tax on inherited property in Canada?
If the property was the deceased’s primary residence, it is exempt from capital gains tax.
However, for secondary properties, such as cottages or rental properties, capital gains tax applies based on the property’s increase in value from the time it was purchased to the date of death. The estate must cover this tax before passing ownership to the beneficiary.
If the beneficiary later sells the property and its value has increased, they will owe capital gains tax on the additional appreciation.
Can trusts be used to reduce estate taxes in Canada?
Yes, trusts are one of the best tools for reducing estate taxes.
A living trust (inter vivos trust) allows assets to be transferred outside of the estate, avoiding probate and reducing taxes. Alter ego trusts and joint partner trusts (for those 65 and older) allow deferral of capital gains tax until the surviving spouse passes away.
Trusts can also provide greater control over asset distribution, helping to protect wealth and minimize tax burdens for beneficiaries.
Can life insurance be used to pay the taxes on your final tax return?
Yes, life insurance is an effective way to cover estate taxes.
Since life insurance payouts are tax-free and bypass probate, the proceeds can be used to cover capital gains tax, income tax on RRSPs/RRIFs, and other estate obligations. This prevents heirs from having to sell assets to cover unexpected tax bills and ensures a smooth transfer of wealth.
What is the biggest tax hit most estates face?
The largest tax liability for most estates comes from capital gains tax on investments, real estate, and business assets, as well as income tax on RRSPs and RRIFs.
When someone dies, their RRSPs and RRIFs are fully taxed as income unless transferred to a spouse or dependent child. Meanwhile, capital gains tax applies to 50% of the appreciation on non-principal residences (i.e. vacation home or rental properties), which can significantly reduce the amount passed to one’s family.
Without proper planning, these tax liabilities can result in forced sales of assets.
What are the best ways you can use to minimize estate taxes in Canada?
There are several strategies to minimize estate taxes:
- Use trusts to hold assets outside of the estate and bypass probate.
- Transfer assets to a spouse to defer capital gains tax.
- Gift assets before death to reduce the value of the taxable estate.
- Use life insurance to cover estate taxes tax-free.
- Ensure registered accounts (RRSPs, RRIFs, TFSAs) have named beneficiaries to avoid probate.
Proper estate planning ensures that more wealth is passed on to your heirs rather than being lost to taxes.
Avoid Ontario’s Hefty “Death Tax”
While Ontario doesn’t have a direct estate tax on your total net worth, income tax on capital gains and deemed dispositions can have a significant impact on your estate. These taxes can dramatically reduce the wealth you pass on to your loved ones.
For instance, assets like real estate (excluding your principal residence) and non-registered investments are deemed sold at fair market value upon death. The resulting capital gains are usually taxed at Ontario’s highest marginal tax rate, which exceeds 53.53% (2024).
Here’s an example: If you have an RRSP or RRIF worth $1,000,000, the government could take $535,000 in taxes upon your death. That’s more than half of your hard-earned savings—gone to taxes, not your family. And that’s before factoring in additional costs like probate fees, executor fees, legal fees, and accounting fees. What will be left for your family?
Did you know that some of your assets may even face double taxation? Without proper planning, the total financial burden on your estate could be staggering.
Simple Steps Can Save You Millions
With our Living Estate Plan, you can not only minimize taxes but also protect and even grow your wealth. Our proven strategies help shield your assets, ensuring more of your legacy goes to your loved ones—not the government.. Donec iaculis posuere cursus. Maecenas diam metus, mattis eget elit id, condimentum molestie purus.
Discover How to Minimize Taxes and Secure Your Legacy
Did you know that without a solid estate plan, taxes and fees in Ontario could claim a significant portion of your wealth?
If you’ve worked hard to build your business, investments, and properties, protecting your legacy for your loved ones is critical. At Strategic Wealth Protection Partners, we specialize in helping high-net-worth individuals in Ontario secure their financial futures.
Our Living Estate Plan is designed to:
- Reduce estate taxes and probate fees.
- Simplify wealth transfer to your loved ones.
- Reflect your values and priorities in every detail.
Your Legacy Matters
With our personalized guidance, we’ll help you navigate options like Living Trusts to protect your assets and ensure your family’s peace of mind. Contact us today to book your Living Estate Plan Consultation and take the first step toward a secure future.
Schedule a Living Estate Plan Consultation
Planning your legacy is about more than numbers—it’s about ensuring your family remembers you and your values are honoured for many years to come.
Estate planning and trusts can feel overwhelming, especially if it’s your first time. That’s why we’re here.
With our simple, 5-Step Living Estate Plan, we make the process easy, helping you create a comprehensive estate plan or trust that protects your assets from taxes and probate fees while preserving your legacy. Tools like The Final Word Journal capture your story, wishes, and essential details like accounts and end-of-life plans, ensuring your family has clarity and comfort.
Take the first step today—schedule a consultation call and give your family the ultimate gift: peace of mind and the assurance they were always your priority.
Read More
If you’re starting your estate planning process, you may find these articles helpful:
- How Much Is an Estate Taxed in Canada?
- What Is the Tax Rate for Trusts in Canada?
- When You Inherit a House in Ontario, Is It Taxable?
- How to Avoid Estate Tax in Ontario
About the Author
RON COOKE, PRESIDENT & FOUNDER OF STRATEGIC WEALTH PROTECTION PARTNERS
With over 30 years in financial services, I’ve seen the challenges families face when a loved one passes—lost assets, unnecessary taxes, and emotional stress. That’s why I created the Living Estate Plan, a comprehensive process to protect assets, eliminate estate and probate fees, and create legacies that are remembered for many years to come.
This plan ensures your family receives not just your wealth, but a meaningful reminder of your care and love. Tools like The Final Word Journal capture your story, wishes, and essential details, offering clarity and comfort during difficult times.
Your final gift should be more than money—it should be peace of mind, cherished memories, and an organized estate.
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Schedule a 30-minute consultation call with Strategic Wealth Protection Partners. Click HERE to schedule a consultation.
