Canada Deemed Disposition on Death in 2026: How the Flat 50% Capital Gains Inclusion Rate Sets the Tax Bill on a $1.2M Ontario Investment Portfolio

The Scenario: $1.2M Ontario Portfolio, $400K Cost Base, Death in 2026

We run this estate through Canada's current 2026 capital gains regime: a flat 50% inclusion rate on all gains, all entities. There is no $250,000 tier and no 66.67% rate — the proposed June 2024 increase that introduced those concepts was cancelled by the federal government on March 21, 2025 before it ever took effect. The rest of the estate-tax architecture — Ontario's top combined marginal rate of 53.53%, the OAS clawback threshold, the spousal rollover, the alter ego trust, the graduated rate estate — is unchanged.

How Section 70(5) Deemed Disposition Works

When Margaret died, the CRA treated her as having sold every non-registered capital asset at fair market value immediately before death. No actual sale happened. Her estate trustee (her daughter) must report the resulting capital gain on Margaret's terminal T1 return — the final income tax return filed for the year of death.

The deemed disposition under section 70(5) of the Income Tax Act applies to:

• Stocks, ETFs, mutual funds, and bonds in non-registered accounts
• Rental properties and recreational properties (cottages)
• Private company shares
• Any other capital property not sheltered by the principal residence exemption, a spousal rollover, or a qualifying transfer to a trust

It does not apply to registered accounts (RRSPs, RRIFs, TFSAs) — those have their own inclusion rules (and when the deceased is a non-resident with a Canadian RRSP, withholding tax and section 116 clearance add an entirely separate layer). RRSPs also carry separate obligations like Home Buyers' Plan repayment that the estate must account for on the terminal return. And it does not apply to the principal residence if the estate claims the PRE under section 40(2)(b).

The Math: $800,000 Capital Gain at the Flat 50% Inclusion Rate

Margaret's $800,000 capital gain flows onto the terminal T1 return through Schedule 3 (Capital Gains). At the flat 50% inclusion rate, half of the gain — $400,000 — is included in taxable income.

Step 1: Taxable capital gain

Step 2: Total taxable income on the terminal T1 return

The deemed disposition is not the only income on Margaret's final return. She also received CPP, OAS, and a RRIF withdrawal during the first three months of 2026.

Step 3: Federal + Ontario income tax

At ~$412,550 of taxable income, Margaret is well into Ontario's top combined bracket of 53.53% (federal 33% + Ontario 13.16% + Ontario surtaxes, applying above approximately $253,000). Using the graduated federal and Ontario brackets, the combined tax on the terminal return works out to approximately:

The OAS Clawback on the Terminal Return

Margaret received three months of OAS in 2026 — approximately $2,227 (3 × $742.31). The OAS recovery tax under section 180.2 kicks in at $95,323 of net income and claws back OAS at 15 cents per dollar above that threshold. At ~$412,550 of net income, Margaret is so far above the threshold that her entire OAS is repaid.

The full-year maximum OAS for ages 65–74 is $8,907.72. Margaret received only $2,227 for three months, so her OAS clawback on the terminal return is approximately $2,227 — the full amount received in 2026.

The real OAS planning lesson is not about the terminal return — by then, the clawback is inevitable on a $400K+ income. The question is whether Margaret could have drawn down the portfolio earlier, keeping her annual income below $95,323 in her living years, to preserve OAS during ages 65–73. On a $1.2M portfolio, that would have required selling $80,000–$100,000 per year strategically — a deliberate drawdown strategy that most advisors would recommend for exactly this profile.

The Reporting Period and the Estate Trustee's Filing Deadline

The terminal T1 return covers the period from January 1 of the year of death to the date of death. For Margaret, that's January 1, 2026 to her date of death in March 2026. All deemed-disposition gains are reported in this period at the flat 50% inclusion rate.

The estate trustee files the terminal return by the later of:

• April 30, 2027 (the normal filing deadline for the 2026 tax year), or
• Six months after the date of death.

For a March 2026 death, the deadline is April 30, 2027. Tax owing on the terminal return is generally due by the same date — interest accrues from the day after.

Ontario Probate on the Non-Registered Portfolio

The income tax is the largest cost, but Ontario's estate administration tax adds to the bill. The $1.2M non-registered portfolio passes through the estate (no beneficiary designation on a non-registered account — those require a will). Ontario probate fees are $0 on the first $50,000 and $15 per $1,000 (1.5%) above that.

On $1,200,000: ($1,200,000 − $50,000) × $15 / $1,000 = $17,250 in probate fees. This cost is based on the fair market value of assets passing through the will, not on the taxable gain.

Three Strategies That Reduce the $185,000 Tax Bill

The $185,000 tax bill exists because $800,000 of capital gain crystallized on a single return. Three strategies could have reduced or eliminated this exposure — each with different prerequisites and trade-offs.

Strategy 1: Spousal Rollover (Section 70(6))

The spousal rollover doesn't eliminate the tax — it defers it. The surviving spouse inherits the $400,000 cost base. When they eventually sell or die, the full gain is taxed at whatever inclusion rate applies then. But deferral has value: the tax-free growth during the deferral period, the possibility of the surviving spouse being in a lower bracket, and the chance to use the graduated rate estate on the second death.

Strategy 2: Alter Ego Trust (Age 65+)

The alter ego trust must be established while the settlor is alive and competent. It requires legal setup costs of $3,000–$5,000 and ongoing annual trust tax filings. On a $1.2M portfolio, the $17,250 probate savings alone justify the setup cost within the first year. The trust also adds control over the timing of asset sales by the trustee, which can matter for managing year-by-year income while the settlor is alive.

Strategy 3: Graduated Rate Estate (Post-Death Income Splitting)

The GRE strategy works best when the estate trustee plans ahead. The deemed disposition under section 70(5) is automatically reported on the terminal T1 return. But section 164(6) allows the estate to elect to carry back capital losses realized by the estate in its first tax year to the deceased's terminal return. Combined with strategic timing of asset sales, the estate trustee can manage the total tax bill across both returns.

The 36-month GRE window is not unlimited. The estate must be designated as a GRE in its first T3 return, and only one estate per deceased can qualify. After 36 months, the estate loses graduated rates and is taxed at the top flat rate — currently 53.53% combined in Ontario on all income.

Total Estate Cost Summary

The $185,000 income tax bill is the largest single cost, and it is driven entirely by the size of the embedded gain — not by any recent rate change. For estates with both a cottage and a portfolio, gains can exceed $1M and the total terminal-return tax can climb past $230,000 — still at the flat 50% inclusion rate.

What This Means for Estates Being Settled Now

If you are an estate trustee settling an Ontario estate in 2026, the inclusion rate to use on the terminal T1 return is 50% — flat, no tier, no $250,000 threshold. The June 2024 proposal that introduced a tiered structure was cancelled before it took effect. The key planning moves are:

• Claim every available capital loss. Capital losses from other assets offset capital gains dollar for dollar before the inclusion rate applies. A $100,000 loss reduces the $800,000 gain to $700,000 and the taxable income by $50,000.
• Designate the GRE in the first T3 return. If the estate qualifies, the graduated rate estate can split income across two returns and save $40,000–$50,000.
• Consider section 164(6) loss carryback. If the estate sells assets at a loss within its first tax year, those losses can be carried back to the deceased's terminal return to offset deemed-disposition gains.
• File the terminal return strategically. The deadline is the later of six months after death or April 30 of the following year. Use the time to optimize the return — gather all cost base documentation, identify losses, and coordinate with the GRE filing.

The Decision Lever That Mattered

Margaret could not control when she died or how big her embedded gain had grown. But she could have controlled how concentrated the gain was in a single taxable event. An alter ego trust — setup cost $4,000 — would have saved $17,250 in probate. A deliberate portfolio drawdown strategy, selling $80,000–$100,000 of gains per year in her late 60s and early 70s and sheltering proceeds in her TFSA, would have reduced the terminal gain materially and preserved her OAS in her living years.

The flat 50% inclusion rate is not the constraint — the concentration of unrealized gains in a single deemed-disposition event is. The solution is the same as it has been for thirty years: spread realization across years, use every available shelter, and plan the deemed disposition before the CRA computes it for you.