Understanding Taxes Owing at Death

Many seniors worry about the taxes owing upon death – or what used to be called Probate Tax. If you have a loved one who is starting to think through their estate, and who is wanting to limit the taxes owing, you may want to know about this too.

Those living in Ontario need not worry. What is now called the ‘Estate Administration Tax’ is relatively small compared to other more important legacy planning issues, like income tax in the year of death or creating trusts for loved ones if needed.

The calculation of this tax assessed at death is fairly simple. First, add up the total value of the estate of the deceased. DO NOT include the value of real estate owned outside of Ontario, insurance owed to beneficiaries or jointly held property that will pass to a survivor upon death.

Next, take $5 for each $1,000 (or part thereof) of the first $50,000 of the estate value and add it to $15 for each $1,000 for the estate value above $50,000. This is what will be owing.

Here’s an example:

If a deceased Ontario resident passed away with an estate valued at $600,000, the Estate Administration Tax would be calculated as:

$5 for each $1,000 up to $50,000 = $250


$15 for each $1,000 above $50,000 = $8,250

A total of $8,500 would be owing upon the death of the deceased. This represents just a 1.4% tax rate.

And here’s a great calculator for any estate size:

The big tax bill will never be this ‘Death Tax’ but rather the ‘Income Tax’ on the final return of the deceased. This is where all assets not jointly-held are deemed sold, and the appropriate taxable capital gains are included in taxable income along with full value of RRSPs/RRIFs (if there is no spouse or common-law partner) and any other taxable income in that year.

The combined Federal/Provincial tax rate is 53.5% for income exceeding $220,000 (2016) in Ontario, so it makes sense to spend more time reducing income tax than trying to minimize the Estate Administration Tax, which will never exceed 1.5% (regardless of size of estate).

So the next time someone complains about estate taxes owing at death, re-direct their energies towards minimizing income tax on their final tax return. This is where the big savings lie, and I’ll address some of these strategies next time.

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