Estate Planning for Canadians

Canadians don’t have to contend with an “estate tax” the way U.S. citizens do but a “deemed disposition tax” applies when they pass away. It’s so named because their investments are deemed to be sold at death. There are ways to minimize an estate’s exposure to this tax and to structure an estate plan that ensures that your beneficiaries get the assets you intend them to receive.

Taxation and Estate Planning

The deemed disposition tax is so named because your investments are deemed to be sold at the time of your death. Any capital gains triggered by their sale are included in a final income tax return filed in the year of your demise. A final tax return also includes the value of any retirement accounts and income received from stocks, bonds, real estate investments, and even life insurance proceeds in the year of death beginning on January 1 up to the date of death.

This final taxation can be substantial because Canadian federal income tax rates range up to 33% as of 2025. Provincial taxes and probate fees also apply. Skipping out on probate costs is possible, however, with proper planning.

The deemed disposition tax is deferred when the assets are transferred to a surviving spouse. It’s deferred even if the assets are held in a spousal trust that provides income to the surviving spouse. But it applies if the spouse sells the assets. Half the capital gains of any stocks, bonds, real estate investments, or other assets are taxable at the deceased’s income tax rate when the spouse dies and the assets are passed on to other heirs.

It’s Important to Make a Will

“Nothing is certain but death and taxes,” according to the old saying attributed to American Benjamin Franklin. You can’t control either of these two inevitable events but you can make a will to ensure that your financial affairs are managed according to your wishes when you’re no longer able to do so due to incapacity or death.

The purpose of a last will and testament is to leave instructions as to how you want your assets distributed after your death and to choose an executor to handle the transfers.

You’re considered to have died intestate if you don’t leave a will. The province you lived in decides how your assets are distributed when this happens in Canada. A province typically distributes the first $50,000 of value to a surviving spouse under the laws of intestacy. It then divides the remainder between the spouse and children. Your parents are next in line to receive your assets if you don’t have a surviving spouse or children, followed by any siblings.

Dying without a will also tends to lead to court delays and extra expenses. The court will appoint a bonded administrator to serve as an executor of the estate in this case. Any assets distributed to children under age 19 must be passed to a bonded guardian or to the Public Trustee. The process of appointing these administrators can be both expensive and time-consuming.

Additional estate-planning tools are available as well.

Consider a Power of Attorney

A power of attorney gives an individual of your choice the legal authority to manage your financial affairs if you become incapable of managing them yourself. It gives someone who is designated as your agent or attorney-in-fact the power to handle day-to-day tasks. These can include:

• Paying bills
• Filing tax returns
• Opening mail
• Banking
• Talking with accountants and lawyers

Create a Living Will

A living will gives healthcare/mental powers of attorney to an individual of your choice. This person acts as your agent or attorney-in-fact and has the authority to implement the medical treatment you wish to receive if you become unable to express your wishes yourself. The document informs doctors, family members, and the courts of your wishes for life support and other medical procedures if you become unconscious, terminally ill, or otherwise unable to communicate.

A living will essentially gives your chosen agent the power to choose whether to “pull the plug” or to decide your fate for you, but its value is debatable. Euthanasia isn’t legal under Section 241 of Canada’s Criminal Code and a living will has no legal status in this regard. But Canada’s Charter of Rights throws the constitutionality of this section of the Criminal Code into question by giving everyone the right to “security of the person and the right not to be deprived thereof.”

A Trust Simplifies Estate Planning

A will ensures that your heirs get exactly what you want them to get but a trust can simplify the process of transferring these assets to them. The main difference is that a trust lets you transfer assets to beneficiaries when you’re still alive. A will transfers your assets when you die.

A trust is a legal entity that owns some or all of your assets, such as bank accounts, real estate, stocks, bonds, mutual fund units, and private businesses. The terms of a trust are more legally binding than those of an ordinary will because a will can be challenged in a court of law as to whether it fulfills the deceased’s “moral obligation.”

A trust also allows you to avoid the probate process in which the contents of your will are made publicly available. Laws governing Canadian trust funds differ from those of other nations.

Types of Trusts

A revocable living trust is the main type of trust in estate planning. You can change or revoke the terms of this kind of trust at any time while you’re alive. The trust instructs the trustee as to how to distribute your assets to beneficiaries while you’re alive, after your death, or if you become incapable of doing so.

You and your spouse can act as trustees and manage the trust’s assets yourselves. This feature of a living trust may be important if a family business is placed into it and you want to continue to have some control over its operations. The surviving spouse continues as trustee after one spouse dies but the trust becomes irrevocable in that only limited changes can be made to its terms after this point.

The income from trust-held assets is taxable at Canadian trust tax rates so living trusts aren’t as popular in Canada as they are in the U.S. where the income is taxed at your personal income tax rate. A living trust established after June 17, 1971 is subject to tax on all income at the highest marginal rate of tax in the province of residence. A testamentary trust that operates only after death is taxed at the personal provincial tax rate.

Assets that are transferred into or out of a Canadian trust are generally treated as if they’ve been sold. They’re taxed on any appreciation or increase in value from the purchase date. The alter-ego trust and joint-spousal trust allow you to avoid capital gains taxation.

The Bottom Line

You’ll need a last will and testament at a minimum and you also may want to consider creating a living will, a power of attorney, and/or a trust to ensure that your assets are distributed according to your wishes. This isn’t something you want to handle yourself, even if you’re well-versed in Canadian law. Consider enlisting the help of one or more professionals.