2026 Ontario Inheritance Tax Guide: Capital Gains & Estate Planning

The capital gains inclusion rate changes that took effect in 2025 continue to significantly impact how inherited assets are taxed in Canada in 2026. With the inclusion rate at 66.67% for gains exceeding $250,000, Ontario families planning their estates need to understand these rules to preserve wealth for the next generation.

Key Tax Rules for 2026: What You Need to Know

The most impactful rules affect high-value estates, particularly those with significant capital property such as secondary homes, investment portfolios, and business assets. Here's what applies in 2026:

Impact on Common Inheritance Scenarios in 2026

1. Cottage and Secondary Properties

For many Ontario families, the cottage represents both cherished memories and significant tax liability. With GTA cottage prices averaging $850,000-$1.6 million in 2026, the inclusion rate can dramatically increase the tax burden on estates.

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 for 2026 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
• Maximizing TFSA contributions ($109,000 cumulative room)

Ontario-Specific Considerations for 2026

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 tens of thousands to the cost of settling an estate.

Strategic Planning Opportunities for 2026

1. Estate Freeze for Business Owners

GTA business owners should consider an estate freeze to lock in current values and shift future growth to the next generation. This strategy is particularly valuable as business valuations recover in 2026.

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 current 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 in 2026

Special Considerations for High-Net-Worth Families

Families with estates exceeding $5 million face particular challenges under the current 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.

Common Mistakes to Avoid in 2026

1. 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. 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. 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. 4. DIY estate planning for complex situations: Professional advice is more valuable than ever. The cost of proper planning pales compared to potential tax savings.

Conclusion: Protecting Your Family's Legacy in 2026

The capital gains tax rules 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.