Estate and trust planning occupies an uncomfortable space in most people’s minds — it requires thinking about death and significant wealth transfers, which most people would rather not do. As a result, it tends to be deferred. The problem is that deferring estate planning does not reduce the tax owing when an estate is settled. It simply means that the estate pays more than it needed to, and that family members deal with complexity and administrative burden during an already difficult time.
The Deemed Disposition at Death
Under the Income Tax Act, an individual is deemed to have disposed of virtually all of their capital property immediately before death, at its fair market value. This means that any accrued capital gains on investments, real estate (other than principal residence), business assets, or shares in a private corporation are triggered and included in the deceased’s income in the year of death, whether or not those assets were actually sold.
For a business owner with a significant accumulated value in their corporation, or an investor with a large unrealized portfolio, this deemed disposition can create a substantial tax liability in the final return.
Source: Canada Revenue Agency. Deemed disposition at death. canada.ca
The Spousal Rollover
Capital property and RRSP and RRIF balances can generally be transferred to a surviving spouse or common-law partner at the deceased’s adjusted cost base (for capital property) or at their full value (for RRSPs and RRIFs), deferring the tax until the surviving spouse eventually sells the property or withdraws from the registered account. This spousal rollover is automatic unless the estate elects out of it.
Understanding when to use the rollover and when to elect out of it requires looking at the surviving spouse’s tax situation, their expected longevity, and the overall estate structure. These are not decisions that should be made at the time of death without professional guidance.
Source: Canada Revenue Agency. Spousal rollovers. canada.ca
RRSP and RRIF at Death
Registered Retirement Savings Plan (RRSP) and Registered Retirement Income Fund (RRIF) balances are generally included in the deceased’s income in the full amount in the year of death unless they are transferred to a qualifying beneficiary. Qualifying beneficiaries include a surviving spouse or common-law partner, a financially dependent child or grandchild, or in some cases a financially dependent child or grandchild with a mental or physical infirmity.
The tax on a large RRSP at death can represent the largest single tax liability in a person’s estate. Strategies to address this during the account holder’s lifetime — gradual conversion to RRIF, systematic withdrawals, naming appropriate beneficiaries — are far more effective than attempting to minimize the damage after the fact.
Testamentary Trusts
A testamentary trust is a trust created by a will that comes into effect on the death of the testator. Until 2016, testamentary trusts enjoyed graduated tax rates — the same progressive rate structure that applies to individuals. Since 2016, most testamentary trusts are taxed at the highest marginal rate, with an exception for Graduated Rate Estates (GREs). A GRE is the estate of a deceased individual that qualifies for graduated tax rates for up to 36 months after death. Planning around the GRE period — timing asset dispositions, income recognition, and distributions — can meaningfully reduce the total tax paid by an estate.
Source: Canada Revenue Agency. Graduated rate estates and qualified disability trusts. canada.ca
Family Trusts
An inter-vivos (living) trust established during one’s lifetime is used for a variety of planning purposes: income splitting within a family, protecting assets from creditors, managing assets for minor children or those unable to manage their own affairs, and facilitating the eventual transfer of a business. Family trusts have specific attribution rules that limit income splitting with minor children under the Tax on Split Income (TOSI) rules introduced in 2018.
A trust must file an annual T3 income tax return reporting all income earned in the trust. Since 2024, most trusts (with some exceptions) are also required to file a Schedule 15 disclosing beneficial ownership information.
Source: Canada Revenue Agency. T3 Trust Income Tax and Information Return. canada.ca
When to Have This Conversation
The right time to begin estate and trust planning conversations is before any specific triggering event — before a serious health diagnosis, before the sale of a business, and certainly before death. An estate planning review with a CPA is particularly timely if you are a business owner with significant assets in a corporation, if you hold substantial real estate or investment portfolios, if your family situation has changed in recent years, or if you have not reviewed your will in five or more years.
Key Takeaway: Deemed disposition at death, RRSP taxation, and testamentary trust rules mean that an unplanned estate pays far more tax than a planned one. The planning tools exist — they simply require action before they are needed.
Nguyen Scott LLP provides trust and estate planning services across Edmonton, St. Albert, Leduc, and Drayton Valley. Start the conversation at nsllp.ca/contact-us/ or call 780-458-5479.