Capital Gains Tax in Canada: The Estate Planning Basics

A retired engineer in Burnaby owns a paid-off principal residence, a cottage on Sproat Lake, a non-registered investment account, and shares in the small consulting corporation he wound down five years ago. He dies in his sleep on a Tuesday. By Wednesday morning, for tax purposes, the Income Tax Act treats him as if he had sold every one of those assets the moment before he died — at full fair market value. His executor will spend the next nine months reconstructing cost bases for assets he never actually sold.

That deemed-disposition rule is the centre of gravity for almost every Canadian estate-planning tax conversation. Canada has no estate or inheritance tax, and never has at the federal level. What it has instead is a capital gains system that catches up at death.

This guide walks the basics: what gets taxed, what doesn't, what the rollovers do, and the handful of planning moves most ordinary Canadians have available. For the bigger picture of how this fits into a full plan, see our estate planning pillar.

The deemed-disposition rule #

Subsection 70(5) of the Income Tax Act provides that, immediately before death, the deceased is generally deemed to have disposed of every capital property at its fair market value at that moment.^[1] Whoever acquires the property as a consequence of the death is treated as having acquired it at the same fair market value, which becomes their new cost base.

The practical effect: any accrued but unrealized capital gain on the deceased's investments, real estate (other than principal residence), private company shares, and other capital property crystallizes on the terminal return. The estate or the surviving spouse inherits at the stepped-up cost — but the tax on the gain belongs to the deceased.

There are equivalent deemed-disposition rules for depreciable property (which can produce recapture of capital cost allowance) and for registered accounts (RRSPs, RRIFs) that operate slightly differently but follow the same broad logic.

What the inclusion rate does #

Capital gains in Canada are not taxed in full. Only a portion of the gain — the inclusion rate — is added to taxable income.

For most of the last 25 years the rate has been one-half (50%). The federal government announced an increase to two-thirds for gains above certain thresholds in the 2024 budget, deferred it in January 2025, and then cancelled the proposed increase entirely on March 21, 2025.^[2][6] So at the time of writing, the 50% inclusion rate continues to apply for both individuals and corporations, including on a terminal return.

Even at 50%, the dollar impact on a large estate can be significant. A $500,000 accrued gain on a non-registered portfolio adds $250,000 to taxable income in the year of death, which a high-bracket taxpayer in many provinces will pay tax on at roughly the top marginal rate.

The spousal rollover #

The single most useful deferral tool is the spousal (and common-law partner) rollover in subsection 70(6) of the Act. Where capital property passes as a consequence of death to:

• a spouse or common-law partner who is resident in Canada immediately before the death, or
• a trust that qualifies as a spouse or common-law partner trust under the Act,

the property generally transfers at the deceased's adjusted cost base rather than at fair market value.^[5] The accrued gain is deferred until the surviving partner disposes of the property or dies.

Two things to know. First, the rollover is automatic where the conditions are met, but the deceased's legal representative can elect out on a property-by-property basis — sometimes useful if the deceased had unused losses or LCGE room. Second, the spouse trust must be carefully drafted: the surviving partner must be entitled to all income and no one else can receive capital during their lifetime, or the rollover is lost.

What death triggers, what death doesn't #

The deemed disposition catches accrued gains on capital property generally. It does not, on its own, do any of the following:

• It does not undo the principal residence exemption — a property that qualified as principal residence for every year of ownership remains exempt at death.
• It does not collapse jointly-held property held in joint tenancy with right of survivorship; the surviving joint tenant takes title by survivorship, although the deceased's share is still treated as disposed of for tax purposes.
• It does not trigger probate fees — those are a separate, provincial regime layered on top.
• It does not impose any tax simply because money or assets are inherited. The recipient receives the assets tax-free; their cost base is the fair market value at the date of death.

The combination of "no inheritance tax but yes capital gains tax" is the single most common point of confusion when Canadians plan against a US-style mental model.

The Lifetime Capital Gains Exemption (LCGE) #

For owners of qualified small business corporation shares (QSBCS) or qualified farm or fishing property (QFFP), the LCGE shelters a lifetime cumulative amount of capital gain — subject to the eligibility rules and the type of property. The limit was $1,250,000 for 2025 — increased from the prior amount with effect for dispositions on or after June 25, 2024 — and, with indexation resuming in 2026, is approximately $1,275,000 (confirm the current-year CRA figure).^[3]

Any unused LCGE at death can be applied against eligible gains on the deceased's terminal return. It does not transfer to heirs. Estate plans that involve an active private corporation often centre on preserving and using LCGE room — through estate freezes, family trusts, and purification of the corporation — well before death.

Filing deadlines for the terminal return #

The terminal T1 return is generally due on the later of:

• the date that would have applied if the taxpayer had not died (April 30 of the following year for most individuals, June 15 for self-employed individuals and their spouses), and
• six months after the date of death.^[4]

A death between November 1 and December 31 typically gives the executor a hard six-month clock from the date of death. Late filing where tax is owing attracts CRA's standard penalty regime, starting at 5% of the balance plus 1% per month.

The estate itself may also have to file a T3 return for any income earned after death, and the legal representative can elect to file optional separate T1 returns (rights or things, partnership or proprietorship, testamentary trust) that can dramatically reduce the overall tax bill in the right circumstances. Those optional returns are one of the most under-used planning tools at death.

Planning levers that actually work #

A handful of moves come up repeatedly in Canadian estate plans where capital gains are the dominant issue:

• Designate the right property as principal residence. Where a family owns more than one residence over time, the principal residence designation is made on disposition. Picking the property with the larger per-year gain to shelter often saves significant tax.
• Plan a spousal rollover with eyes open. The deferral is useful but creates a larger tax bill for the survivor. For couples without children of their own, that may be the right answer; for blended families, the size of the eventual second-death tax bill matters.
• Realize gains across years, not all at once. Triggering gains while alive — gifting appreciated property, selling shares incrementally — spreads the inclusion across multiple tax years and brackets rather than stacking everything onto the terminal return.
• Use insurance to fund the tax liability. Where a cottage or family business is the centrepiece of the plan and rollovers don't apply, a permanent life insurance policy structured to mature on the second death is the standard mechanism to keep heirs from having to sell the asset to pay tax.
• Donate appreciated public securities. Donating publicly-traded securities in-kind to a registered charity eliminates the capital gain on those securities and generates a donation credit at fair market value.

What we focus on at It's Simple Will #

It's Simple Will helps Canadians write a clear, valid will and capture the executor information that makes the tax work tractable. The will itself can carry residue clauses that route assets through a spousal rollover, set up testamentary trusts, and direct specific bequests of appreciated property. The Life Discovery Kit captures the cost bases, account institutions, and adjusted cost base records the executor will need on day one.

For the bigger picture, see our estate planning guide and the pillar on what probate is in Canada. Anything involving private corporation shares, large non-registered portfolios, or property in multiple jurisdictions is worth running past a CPA and an estates lawyer alongside the DIY work — the deemed-disposition math has a lot of moving parts. Try the It's Simple Will app when you're ready to put a will in place.