No, Canada Doesn’t Have a Death Tax: Here’s What Really Happened
A reader sent me a CTV News story that made the rounds this week titled, “Daughter hit with $660,000 tax bill when both parents died in same year.” The reader wondered if this was proof that retirees should drain their RRIFs early to avoid a crushing “estate tax.”
It’s the kind of story that spreads quickly because it sounds outrageous and unfair. But like so many financial headlines, it leaves out critical context and stokes unnecessary fear.
Let’s start with the obvious: both spouses dying within a year of each other in their early 60s is incredibly rare. Even with careful RRSP or RRIF drawdown planning, there wouldn’t have been enough time to meaningfully reduce the balances before both deaths occurred.
This is a very specific and unfortunate situation, not something that most retirees need to plan around as if it’s likely to happen to them.
The article also glossed over the biggest factor in that $660,000 tax bill: the cottage.
In Canada, your principal residence is exempt from capital gains tax, but a second property like a cottage is not. If that cottage was purchased decades ago and has appreciated substantially in value, the capital gain could easily represent hundreds of thousands of dollars in taxable income when the property is sold or deemed sold at death.
Combine that with two large RRIFs collapsing in the same tax year and it’s no surprise that the total tax bill looked enormous. Selling the cottage would have more than covered those taxes, which makes this less of a tragedy and more of a timing and preference (wanting to keep the cottage) issue.
Here’s the story we were told:
- Parents pass away and leave a $715,000 RRSP balance.
- The RRSPs are fully taxed as income on the terminal (final) tax return, resulting in taxes owing of about $340,000.
- The family cottage has accrued significant capital gains, which adds another $320,000 in tax.
- The total tax bill is $660,000, leaving just $55,000 in “inheritance.”
Sounds awful, right? But here’s what’s missing: what happened to the cottage?
If there’s $320,000 of tax on the cottage, that means there were roughly $1.28 million in capital gains. In other words, the cottage was worth at least $1.28 million, and likely more since the parents didn’t buy it for nothing in 1998 and may have claimed the principal residence exemption since 2020.
The article suggests the kids inherited the cottage and used the RRSP proceeds to cover the tax bill so they wouldn’t have to sell it. If that’s the case, then the family didn’t inherit $55,000 – they inherited about $1.34 million after tax.
When you look at it that way, the total estate value was roughly $2 million, and about $660,000 went to taxes. That’s an effective tax rate of around 35 percent. It’s not insignificant, but it’s hardly the “death tax” horror story the headline makes it out to be.
If you inherit a $1.28 million cottage after taxes are paid, you’re doing just fine. It’s just not as clickable as “family loses inheritance to government.”
The real shame here is how poorly these stories are reported and shared. The journalist missed the key details, and some advisors have even used the story to scare clients into acting rashly. Good financial planning isn’t about panic or politics. It’s about understanding the rules and planning accordingly.
Canada doesn’t have an estate or inheritance tax. What we do have is a tax-deferred system where RRSPs and RRIFs eventually become taxable income, and where secondary properties trigger capital gains. These are known quantities that can be planned for years in advance.
So what should retirees actually do? The goal isn’t to eliminate taxes altogether, but to smooth them out over time. That might mean drawing a bit more from your RRIF each year, especially if you’re in a lower bracket now than your estate might face later. You can use those withdrawals to top up your TFSA or non-registered account – essentially shifting money from your left pocket (taxable) to your right pocket (tax-free or more tax-efficient).
But it’s a delicate balance. Paying too much tax now to avoid a hypothetical estate bill can leave the surviving spouse with less income and less flexibility. Since women tend to live longer, that usually means the younger wife could be left with fewer resources later in life. It’s far more common for one spouse to outlive the other by many years than for both to pass away in the same year.
We can’t necessarily plan around edge-cases like this either. If I knew in advance that my wife and I would die in our early 60s then we’d be retired right now and living our best life. But prudent financial planning means ensuring you have enough resources to last if you live beyond a normal life expectancy, not if you both tap out unexpectedly early.
The bottom line: this CTV story wasn’t about an unfair “death tax.” It was about what happens when large tax-deferred accounts and valuable real estate meet the tax rules that have always been in place. Proper planning – coordinated RRIF withdrawals, TFSA contributions, spousal rollovers, and thoughtful estate planning – can prevent unpleasant surprises. The government didn’t “take” this family’s wealth. The math simply caught up to them.
There was so much FUD in the original article and TV spot, it wasn’t funny. But at least there’s a silver lining: you and others are doing a fine job educating folks about the reality of the matter.
Still a lot of money if you are keeping the cabin. Asset rich and cash poor is a real thing.
So sell the cottage.
The value of the estate is much more than you give here. You’ve left out the value of the principle residence. If the cottage is the secondary residence and subject to capital gains, there must be a principle residence that has no capital gain.
My understanding is they sold their primary residence in 2019 and moved into the cottage. The cottage has capital gains from 1998 to 2019 and then became their primary residence afterwards. I don’t know if there was any cash or TFSA funds, but the article did mention some life insurance as well (but of course left out the amounts).
I wonder what would have happened had the surviving spouse signed the cottage over to a family member before their untimely death? Since there is no gift tax, that I know of in Canada, would that have saved paying the taxes?
Are there benefits in gifting assets? As for the RRSP I suppose the best and only recourse might have been for the parent (s) to have had a life insurance policy to cover the deferred taxes of the RRSP and or RIFF. Thought?
Gifting capital assets triggers a deemed disposition otherwise it’d be a massive tax dodge.
There’s no tax in Canada if you gift an after-tax asset to a family member. So, if you have $100k in cash in your bank account and give to your child, there are no tax consequences to anyone. But there is tax if you give away a capital asset (like a cottage) with an embedded capital gain. You are deemed to have sold the asset at fair market value and would owe taxes on the capital gain up to that date, even though no cash was exchanged. It’s not really a “gift tax” but rather the income tax payable on the capital gain, same as if you had sold the property or died.
If it was important to the parents that funds be available on their passing and that the cottage not be sold, then using life insurance to cover the eventual capital gains tax would have been worth considering.
I was wondering the same thing. If the cottage is the primary residence then there should not be any capital gains if one of the parent sells it in the due course or gifts it, right? Would love your thoughts Robb
The change in use from being a cottage to the principal residence would have resulted in a deemed disposition at the time of the changeover, but the capital gains can be deferred until it is sold (or in this case, the owners die) if elected under ITA subsection 45(3).
Hi Krishna, there would have been capital gains accrued from 1998 (time of purchase) to 2019 (use change to principal residence as Sam explained below). The CRA doesn’t forget…
Shame on CTV News for broadcasting such a story without first having the facts and having such a deceiving head line suggesting we have an inheritance tax. Like some other readers, I knew it was false as soon as I read it but I assume many people would have believed it coming from CTV.
Robb, you’re the calm voice of sanity. Thanks for doing what you do.
Thank you for this article. I find news like that so frustrating when the author either has no understanding or writes the article to make the point they are trying to make instead of the accurately describing the situation. As a CPA, articles like that make my life worse because my clients call me angry about what might happen to them, or make bad decisions because of bad information.
I saw two versions of this “news”. One on CTV and the other on Money.ca. Both articles had comments from uninformed people about how the government is taxing everyone on money they’ve already paid tax on. To me, it was shocking that so many people were so ignorant of how RRSPs, RRIFs, capital gains, etc. are treated upon death. I’ve known about this long before anyone I knew died.
As Rick Knudsen said, shame on CTV News for not setting the facts in this case. Even more, they should have just turned this story down. It’s not newsworthy except if you’re stoking outrage.
Worthy of note here…
Many people have bought or built a fairly modest cottage in the 1950s that they want their children to continue to enjoy after their death. The huge appreciation of cottage values has made this a significant capital gains cost that the estate or the children do not have the funds to cover. For example a modest 800 square foot cabin that is now worth $600K would result in approx $300K in net capital gains and a $105K tax bill that the kid(s) can’t afford so the family cottage must be sold ($600K x 50% = $300K x 35% = $105K) . Capital gains should not be applied if the cottage is passed on to the children! The total capital gains should only be triggered when the cottage is sold. This would be a much fairer situation.
Hi Anne, thanks for your comment. I appreciate the “mom & pop” sentiment but the fact is that mostly wealthy people own second (and third) properties and imagine a world in which they could just pass down those properties indefinitely, leaving them in the family and paying no tax at all.
Meanwhile we’re in a housing crisis and young Canadians cannot afford to buy a single home at these inflated prices – and there’s no inventory.
Also, a fun fact that I’ve noticed – in many cases the kids don’t want to keep the cottage. They’ve moved, it’s a pain to get there for one or two weeks a year, the property taxes and upkeep are an ongoing burden, or there are fights between multiple children about who wants to keep it and who wants to sell it.
Selling the cottage solves every issue here except for the sentimental ones.
105k on a 600k capital gain is actually fairly reasonable.
Journalism has falen into disrepute.
I wish that journalists and editors who publish these stories had a stronger understanding of personal finance. A few minutes of research could have poked these holes in the story before it was published.
I’m surprised that the issue of probate fees was not addressed in the conversation of how the asset/cash transfer happened in this case. Is anyone able to comment on how probate fees would impact this sceanario? Thanks, I’m looking for a safe place to ask. Whether you call it a fee or a tax, it’s money that does not get passed along.
Hi Barb, you’re right to bring up probate fees – it’s another layer of cost when an estate is settled, but it’s often misunderstood or overstated.
In most provinces, registered accounts like RRSPs, RRIFs, and TFSAs with a named beneficiary bypass probate entirely. So, those assets wouldn’t face probate fees.
Where probate applies is on assets that need to pass through the estate, such as real estate (like a cottage held solely in the deceased’s name), non-registered investments, or bank accounts without a joint owner or named beneficiary. The cost varies by province – for example, Ontario’s Estate Administration Tax is roughly 1.5% of the estate value over $50,000.
So, if the cottage was worth $1.3 million, probate fees would be about $19,500. That’s not nothing, but it’s small compared to the potential $300,000–$350,000 tax bill on capital gains for a long-held property.
Calling it a “tax” isn’t totally wrong, but probate fees are generally modest in the grand scheme – and in some provinces (like Alberta) they’re capped at just a few hundred dollars.
I am so happy to have come across this article (actually my husband found it) because I too was surprised by that article from CTV News and had questions. Thank you to Boomer and Echo! Looking forward to many more useful and trustworthy articles! I will be subscribing!
Thanks Joanne, appreciate the kind words!
You make a fair point that the situation was unusual, but I think it completely misses the bigger issue. The problem isn’t whether the government followed the rules. Let’s start with the main truth here. These taxes are being applied to money that has already been taxed many times before. People earn income and they pay income tax. They use what is left to buy things and they pay sales tax. They invest what is left after that, and when those investments grow, they are taxed again. Then, at the end of their lives, whatever is left, the savings, the property, the retirement accounts, gets taxed one final time before it can be passed down. That is tax on top of tax on top of tax. It is not hard to see why people are frustrated. When the author says Canada does not have an estate tax, that is only true on paper. In reality, when a person dies, their RRSPs or RRIFs are treated as if they were cashed out all at once, and capital gains are triggered on any properties or investments they hold. It may not be called an estate tax, but it sure acts like one. The government collects a huge portion of a person’s life savings before their children ever see a dime. The argument that this is just how the math works misses the moral side of it. We should be encouraging people to save, invest, and plan responsibly so they do not have to depend on government programs later in life. Instead, our system does the opposite. It punishes people for doing exactly what they are supposed to do, which is building security for themselves and their families. Canadians are not asking for a world without taxes. We are asking for a fair system that recognizes how much has already been taken over a lifetime. A system that rewards independence and careful planning instead of treating every death as an opportunity for another tax grab. The author ends by saying the government did not take this family’s wealth, that the math just caught up with them. But that is exactly the point. The math should not work this way. It is not about one unlucky family. It is about a tax structure that quietly drains people’s savings in layers, and most Canadians do not realize how much until it is too late. The real shame is not the headline. It is that we have accepted this as normal.
@CanadianFire – Sorry, but I have to push back here. An RRSP is funded with pre-tax dollars and then grows on a tax-deferred basis. So it has absolutely not been taxed before.
Investments outside of a registered plan are subject to capital gains, yes, but only 50% of the gain is taxable and as joint owners they’d get to split that gain again (plus claim the principal residence exemption for five years).
You’re saying that it’s not fair to tax the gains of someone who won the real estate lottery in Ontario?
We already get a principal residence exemption and annual TFSA room to allow you to move money from left pocket (taxable) to right pocket (tax free) each year.
You’re talking about morals and motivation to save, yet we have a housing crisis and young people are struggling with the cost of living because people are hoarding real estate and don’t want to pay taxes.
I understand where you are coming from, and yes, RRSPs are funded with pre-tax dollars. But the broader point is not just about how one specific account works. It is about the overall impact of taxation over a person’s lifetime. People earn income and pay tax on it. They use what is left to live, to save, or to invest. Even before money goes into an RRSP, TFSA, or a second property, it is money that has already been earned through taxed income. So by the time someone is saving or investing, they are usually doing it with what remains after several other forms of tax have already been paid. When that money grows, whether through investments or property, it is taxed again. And when a person passes away, their RRSPs or RRIFs are treated as if they were fully cashed out, while capital gains are triggered on properties and investments. It may not be called an estate tax, but the effect is the same. A large portion of a lifetime of savings is taken before a family ever receives it. The issue is not about whether people should pay taxes. It is about how fair it is to keep taxing the same dollars again and again in different forms. The system rewards short-term spending but punishes long-term planning and discipline. Most Canadians are not trying to avoid their share of taxes. They are trying to save responsibly so they do not need to rely on government programs later in life. When it comes to capital gains, the situation is also not as simple as it looks on paper. Owning property or investing involves years of expenses and risk that the tax code does not fully recognize. People pay property taxes every year even when values stay flat. They pay for maintenance, insurance, utilities, and interest. They pay realtor commissions and legal fees when they sell. And over time inflation eats away at what seems like profit. By the time everything is added up, the actual net gain is often far smaller than it appears, yet the government still taxes it as if it were pure profit. That is why many Canadians question whether the system is truly fair. The tax is applied to a nominal gain that does not reflect all the costs and risks carried along the way. It ends up punishing the same responsible behaviour that the government claims to encourage. This is not about defending one family or one situation. It is about recognizing that our system quietly drains the savings of people who have worked hard, followed the rules, and planned for their future. The math may check out on paper, but it does not feel right in practice. Canadians are not asking for special treatment. They are asking for a system that acknowledges how much has already been paid and that rewards independence and long-term responsibility rather than penalizing it.
I understand where you are coming from.
Robb’s answer still applies.
To add to Robb’s answer: past taxes paid were not sufficient to fund government benefits like OAS, or our healthcare system – mostly utilized by the elderly.
This adds to government debt being passed along to younger generations who are already struggling.
Growing debt funding provincial and municipal services is also happening. In each instance kicking the can down the road for younger people to pay for in the future.
By the way, I am a retiree, but feel we are not paying our fair share at the detriment of our younger generations.
“Even before money goes into an RRSP, TFSA, or a second property, it is money that has already been earned through taxed income.”
No, the money that goes into an RRSP is not taxed. It is not taxed income. The tax is paid on that money at withdrawal.
I was very happy to come across this post as I also thought the articles were ‘light on details’ (ie what about this cottage they likely now own)
Great conversation and site bookmarked for when I retire !