Deemed Disposition on Death in Canada 2026: The Terminal Return Capital Gains Bill on a $750K Portfolio (and the 50% Inclusion Rate)

What "Deemed Disposition at Fair Market Value" Actually Means

Under section 70(5) of the Income Tax Act, a person who dies is deemed to have disposed of all their capital property at fair market value immediately before death. Nobody sold anything. CRA creates a fictional sale — and taxes the gain as though it happened.

This applies to every piece of non-exempt capital property the deceased owned:

• Non-registered investments: stocks, ETFs, mutual funds, bonds held outside RRSP/TFSA
• Real estate: rental properties, vacation properties, bare land (the principal residence may be exempt via the PRE — see our PRE guide)
• Business assets: shares of a private corporation, partnership interests, farm/fishing property
• Other capital property: art, collectibles, cryptocurrency — anything with an adjusted cost base and a fair market value

Assets that do NOT trigger the s.70(5) deemed disposition:

• RRSPs and RRIFs: taxed differently — as ordinary income, not capital gains (see section below)
• TFSAs: pass to a successor holder or designated beneficiary tax-free; no deemed disposition
• Life insurance proceeds: paid to a named beneficiary outside the estate, tax-free
• Property passing to a surviving spouse: deferred under the s.70(6) spousal rollover (see section below)
• Principal residence (if fully exempt): the deemed disposition fires, but the Principal Residence Exemption may wipe the entire gain to $0

The $750K Portfolio: Worked Example of the Terminal Return Tax Bill

A Mississauga investor dies in 2026 holding a non-registered portfolio of Canadian and US equities worth $750,000. She bought the positions over 15 years for a total adjusted cost base of $400,000. No surviving spouse — the portfolio passes to her adult daughter.

That $93,678 is the capital gains tax on the portfolio alone. It hits the deceased's terminal T1 return. The estate is responsible for paying it before distributing assets to the heir. And it doesn't include Ontario probate fees — another $10,500 on the $750K if the portfolio passes through the will.

The same gain taxed across four provinces

Province of residence at death determines the marginal rate. Here's what the same $350,000 capital gain costs in different provinces — all at the top combined marginal rate:

The spread between Ontario and Saskatchewan on the same gain: $10,553. Province of residence is an underappreciated lever in estate tax outcomes — and it's locked in at death. You can't change it after the fact.

The Terminal T1 Return: How the Executor Reports These Gains

The terminal T1 return is the deceased's final income tax return, covering income from January 1 of the year of death through the date of death. Every deemed-disposition capital gain is reported on Schedule 3 (Capital Gains or Losses) of this return. Each asset is listed separately: description, date of acquisition, proceeds of disposition (FMV at death), adjusted cost base, and the resulting gain or loss.

For a portfolio with dozens of positions, this means dozens of Schedule 3 entries. The executor needs:

• Date-of-death market values for every holding (the brokerage provides a date-of-death statement on request)
• Adjusted cost base for every position (including reinvested distributions, return-of-capital adjustments on ETFs, and any ACB adjustments from prior dispositions)
• Foreign currency conversion — US-dollar holdings must be converted to CAD at the Bank of Canada exchange rate on the date of death

Filing deadlines for the terminal return

The terminal T1 return is due on the later of:

• 6 months after the date of death, or
• April 30 of the year following death (June 15 if the deceased or their spouse carried on a business)

The extended deadline for filing does not extend the deadline for paying the tax balance. Interest accrues on any unpaid balance from April 30 of the year following death. Executors handling large deemed-disposition tax bills should estimate the tax owing early and arrange payment even before the return is finalized.

The Spousal Rollover: Section 70(6) Defers Everything

When capital property passes to a surviving spouse or common-law partner — directly or through a qualifying spousal or common-law partner trust — section 70(6) of the ITA overrides the deemed disposition. Instead of triggering a gain at FMV, the property transfers at the deceased's adjusted cost base. No gain, no tax, no terminal-return hit.

Worked example: the $750K portfolio with a surviving spouse

The rollover saved $93,678 at the first death — but the bill at the second death is $133,825, because the portfolio grew and the original cost base traveled with it. The rollover is a deferral, not a gift. It's the right choice when the surviving spouse needs the portfolio for retirement income. It's potentially the wrong choice if the estate has the liquidity to pay the tax now and wants to lock in a lower gain.

The rollover is automatic — the executor doesn't need to elect into it. But the executor can elect out on the terminal T1 return, triggering the deemed disposition at first death. This is a strategic decision: electing out triggers immediate tax but resets the cost base for the surviving spouse, reducing or eliminating their future gain.

The RRSP/RRIF Trap: This Is NOT a Capital Gain

This is the single most expensive mistake executors make: treating the RRSP or RRIF like a capital gain. It's not. Not even close.

When the holder of an RRSP dies, the full fair market value of the RRSP is included in the deceased's income on the terminal T1 return under section 146(8.8) of the ITA. For a RRIF, it's section 146.3(6). This is ordinary income — fully taxable at marginal rates. There is no 50% inclusion rate. There is no capital gains treatment.

The $200K RRIF generates more tax than the $750K portfolio, despite being worth far less. That's the brutal math of 100% income inclusion vs. 50% capital gains inclusion.

And if both the portfolio and the RRIF are on the same terminal return? The income stacks. The deceased's terminal return would carry $175,000 (taxable capital gain) + $200,000 (RRIF income) = $375,000 of taxable income — all pushed into the top bracket. Combined tax at 53.53%: approximately $200,738.

The Graduated Rate Estate: Taxation After Death

The terminal T1 return covers everything up to the moment of death. What happens to the estate's assets after death is a separate tax story.

The estate is its own taxpayer. Income earned on estate assets after death — dividends, interest, rental income, capital gains from selling assets — is reported on a T3 Trust Income Tax and Information Return, not on the terminal T1. The estate's tax year starts the day after death and can end on any date within 12 months (the executor chooses the first fiscal year-end).

GRE status: graduated rates for 36 months

For the first 36 months after death, the estate can qualify as a Graduated Rate Estate (GRE). This means the estate is taxed at the same graduated brackets as an individual — not at the flat top marginal rate that applies to most trusts.

Without GRE status, every dollar of estate income is taxed at the top rate. In Ontario, that's 53.53% from dollar one. With GRE status, the first ~$53K of estate income is taxed at the lowest bracket (~20.05%), with rates rising through the same brackets as individual taxpayers.

To qualify as a GRE, the estate must:

1. Arise as a consequence of the individual's death
2. Be designated as a GRE in its first T3 trust return
3. Be within 36 months of the date of death
4. Only one estate per deceased individual can be designated as a GRE

Worked example: estate sells the $750K portfolio 4 months after death

GRE status saved $4,185 on a modest $25K gain. On larger post-death gains — say the estate holds real estate that appreciates $200K before selling — the GRE savings run into tens of thousands. Executors should designate GRE status on the estate's first T3 return. There's no downside if the estate qualifies.

The 50% Inclusion Rate: Confirmed for 2026

Every worked example in this guide uses the 50% capital gains inclusion rate — the rate that actually applies in 2026. The background matters, because confusion on this point is widespread.

The June 25, 2024 federal budget proposed increasing the inclusion rate to 66.67% on individual capital gains above $250,000 (and 66.67% on all gains for corporations and trusts). That proposal was deferred on January 31, 2025 by the Trudeau government to a start date of January 1, 2026, then cancelled outright on March 21, 2025 by the Carney government. The 66.67% rate never took effect.

Under section 38(a) of the ITA, the capital gains inclusion rate in 2026 is a flat 50% — for individuals, corporations, and trusts. No tiered structure. No $250K threshold. If you read an article citing "two-thirds inclusion" or "66.67%" as current 2026 law, that article is wrong.

Planning Levers: What the Executor (and the Deceased) Can Do About This Bill

A $93,678 tax bill on a $750K portfolio isn't avoidable if the deceased has no surviving spouse and didn't plan ahead. But the bill is movable — and in some cases, drastically reducible:

1. Spousal rollover — defer the entire bill

If there's a surviving spouse, the s.70(6) rollover defers the deemed disposition to $0 tax at first death. This is automatic — the executor doesn't need to do anything. The downside: the gain is bigger at the second death (because the portfolio may have grown), and there's no surviving spouse for a second rollover.

2. Capital losses in the terminal year — offset the gain

If any of the portfolio positions are underwater (FMV below ACB), the deemed disposition triggers capital losses on those positions. Losses offset gains in the same year. And uniquely for the terminal return, net capital losses can be carried back to the year before death — something living taxpayers can't do with the same flexibility.

3. Charitable donations on the terminal return

Donations made by will — or by the estate within 60 months of death — can be claimed on the terminal T1 return. The donation tax credit can offset up to 100% of the deceased's net income in the year of death (and the year before). For a high-net-worth estate with philanthropic intent, a testamentary charitable donation can absorb a large portion of the deemed-disposition tax.

4. Life insurance — pay the tax without selling the portfolio

A permanent life insurance policy with a death benefit of $100–150K, owned outside the estate, pays the heir (or the estate) enough to cover the tax bill without liquidating the portfolio. The insurance proceeds are tax-free. This is the cleanest solution for someone who knows their portfolio will trigger a large deemed-disposition gain and wants the heir to keep the investments intact.

5. Lifetime RRIF drawdown — reduce the stacking problem

If the deceased had both a large non-registered portfolio and a large RRIF, the combined income on the terminal return is devastating. Drawing down the RRIF faster during retirement — taking more than the minimum in lower-income years — reduces the RRIF balance at death. Every dollar withdrawn during a lower-bracket year is a dollar that doesn't stack on top of the capital gains at death. This is the same "rebalance through the trough" strategy that applies to any retiree with both registered and non-registered assets.

Common Executor Mistakes on the Deemed Disposition

1. Treating the RRIF as a capital gain. The RRIF is ordinary income at 100% inclusion. The capital gain on the non-registered portfolio is at 50% inclusion. Conflating the two understates the tax bill by 40–60%.
2. Forgetting to request date-of-death valuations. The brokerage produces a date-of-death statement showing the FMV of every holding on the date of death. This is the number that goes on Schedule 3. Using the month-end statement or the value on the day the estate is opened will produce the wrong gain.
3. Using incorrect adjusted cost bases. ACB must reflect return-of-capital distributions, reinvested dividends (if held in a DRIP), corporate actions (stock splits, mergers), and any prior dispositions. The original purchase price is often not the correct ACB.
4. Missing the spousal rollover on registered accounts. If the RRSP/RRIF names the estate as beneficiary instead of the surviving spouse, the rollover may not apply — and the full value is included as income on the terminal return. A one-line beneficiary designation change during the deceased's lifetime could have saved $100K+ in tax.
5. Distributing estate assets before paying the tax. The executor is personally liable for tax owing if they distribute estate assets to beneficiaries before obtaining a CRA clearance certificate. The clearance certificate confirms all taxes have been paid. Distributing early is the executor's personal financial risk.

The Full Picture: $750K Portfolio + $200K RRIF + $1M Home

Most estates don't have just one type of asset. Here's how the tax stacks when an Ontario resident dies with all three — and no surviving spouse:

On a $1.95M gross estate, roughly $229,000 — nearly 12% — goes to tax and probate before the heir receives anything. The home is tax-free (thanks to the PRE). The non-registered portfolio is hit at the 50% inclusion rate. The RRIF is hit at 100%. Probate adds another layer.

The planning that would have changed this outcome the most: naming a spouse as RRIF beneficiary (saves $107K), naming a beneficiary on the TFSA (bypasses probate), and holding the home in joint tenancy with the intended heir (bypasses probate on $1M). Each of those decisions costs $0 during the deceased's lifetime. At death, they're worth six figures.