The 2025 federal budget has introduced significant changes to how inherited assets are taxed in Canada, with the capital gains inclusion rate increasing from 50% to 66.67% for gains exceeding $250,000. For Ontario families planning their estates, understanding these changes is critical to preserving wealth for the next generation.

Key Changes for 2025: What You Need to Know

The most impactful change affects high-value estates, particularly those with significant capital property such as secondary homes, investment portfolios, and business assets. Here's what's changing:

🔑 Key Change Alert

• Capital gains inclusion rate increases to 66.67% for gains over $250,000
• First $250,000 of capital gains remains at 50% inclusion rate
• Principal residence exemption remains unchanged
• Lifetime capital gains exemption for qualified small business shares increases to $1,016,836

Impact on Common Inheritance Scenarios

1. Cottage and Secondary Properties

For many Ontario families, the cottage represents both cherished memories and significant tax liability. With GTA cottage prices averaging $800,000-$1.5 million, the new inclusion rate can dramatically increase the tax burden on estates.

Example: Muskoka Cottage Inheritance

Purchase Price (1995): $200,000
Fair Market Value (2025): $1,200,000
Capital Gain: $1,000,000
Tax Under Old Rules: ~$135,000
Tax Under New Rules: ~$180,000
Additional Tax Burden: $45,000

2. Investment Portfolios

Non-registered investment accounts face similar challenges. Toronto professionals who've built substantial portfolios outside their RRSPs and TFSAs need to consider the tax implications for their beneficiaries.

Strategic planning opportunities include:

Crystallizing gains before death through planned dispositions
Using spousal rollovers to defer taxation
Implementing prescribed rate loans for income splitting
Converting non-registered investments to insurance products

Ontario-Specific Considerations

Probate Fees (Estate Administration Tax)

While federal tax changes grab headlines, Ontario's probate fees remain a significant cost. Currently set at 1.5% on estates over $50,000, these fees can add thousands to the cost of settling an estate.

💡 Planning Tip

Multiple wills remain an effective strategy for Ontario residents. By using a primary will for assets requiring probate and a secondary will for private company shares and personal effects, families can save significant probate fees.

Strategic Planning Opportunities for 2025

1. Estate Freeze for Business Owners

GTA business owners should consider an estate freeze before the new rules fully impact their succession planning. This strategy locks in today's values and shifts future growth to the next generation.

2. Charitable Giving Strategies

With higher tax rates on capital gains, charitable donations become even more attractive. Consider these approaches:

Donating publicly traded securities directly (zero capital gains tax)
Establishing a charitable remainder trust
Using life insurance to fund charitable bequests
Creating private foundations for family legacy planning

3. Life Insurance as an Estate Planning Tool

Permanent life insurance becomes increasingly valuable under the new tax regime. Policies can:

Provide tax-free funds to pay estate taxes
Equalize inheritances among beneficiaries
Preserve cottage properties for the family
Fund buy-sell agreements for business partners

Action Steps for Ontario Families

📋 Your 2025 Estate Planning Checklist

1.Review and update your will to reflect new tax realities
2.Calculate potential tax liability on all capital property
3.Consider triggering capital gains strategically before death
4.Explore insurance options to cover increased tax liability
5.Implement multiple wills to minimize probate fees
6.Review beneficiary designations on all accounts
7.Document cottage succession preferences with family

Special Considerations for High-Net-Worth Families

Families with estates exceeding $5 million face particular challenges under the new rules. Advanced strategies become essential:

Family Trusts

While recent changes to trust taxation have reduced some benefits, properly structured family trusts still offer advantages for income splitting and succession planning. The key is working with advisors who understand both the opportunities and limitations.

Cross-Border Considerations

Many GTA families have U.S. connections through property ownership or family members. The interaction between Canadian and U.S. estate taxes requires careful planning, particularly for estates exceeding the U.S. estate tax exemption of $13.61 million USD per person in 2025.

Timeline: When to Take Action

⏰ Critical Dates for 2025

September 2025: Review and update estate plans before year-end
October 2025: Implement any trust or corporate restructuring
November 2025: Complete charitable giving for 2025 tax year
December 2025: Finalize any capital gains crystallization strategies

Common Mistakes to Avoid

1. Focusing solely on tax minimization: While taxes matter, don't let the tax tail wag the dog. Family harmony and clear succession planning often matter more than saving the last tax dollar.
2. Neglecting to communicate with beneficiaries: Surprise inheritances with large tax bills can create family conflict. Have open discussions about estate plans and tax implications.
3. Failing to update plans regularly: Tax laws change, as do family circumstances. Review your estate plan at least every three years or after major life events.
4. DIY estate planning for complex situations: The new tax rules make professional advice more valuable than ever. The cost of proper planning pales compared to potential tax savings.

Conclusion: Protecting Your Family's Legacy

The 2025 inheritance tax changes represent the most significant shift in Canadian estate taxation in decades. For Ontario families, particularly those in the Greater Toronto Area with substantial real estate holdings and investment portfolios, proactive planning has never been more critical.

The good news? With proper planning, many of these increased tax burdens can be mitigated or eliminated entirely. The key is starting early and working with advisors who understand both the technical tax rules and the human side of estate planning.

💬 Ready to Protect Your Estate?

Don't wait until it's too late. The new tax rules make early planning essential for preserving your family's wealth. Our Certified Financial Planners specialize in navigating these complex changes for Ontario families.

Call 1-800-PROSPER to schedule your estate planning review today.

2025 Ontario Inheritance Tax Changes: What You Need to Know