Net worth counts an RRSP or a RRIF at its full balance, but that money has never been taxed. When the last person in a household dies, it is taxed all at once, on their final return. So is the gain on investments outside a registered account. The plan shows this tax in its last year so that "what is left" means what is left after it.
What the engine does
It takes the household to die at the end of the plan's last year. In a couple, the first death passes the savings to the survivor without tax, so the whole household's savings land on one final return: the youngest person's. That return adds:
- every RRSP, RRIF and FHSA balance, as income;
- the gain on every non-registered account (what it is worth less what was paid for it), as a capital gain, half of which is taxed;
- the gain on every home still held, at its market value with no selling costs, less the years it was designated as your principal residence, so the home you live in usually adds nothing and a cottage or rental adds its gain;
- on a rented home whose depreciation (capital cost allowance) was claimed, that depreciation taken back as income, up to what the building cost. The building is taken to be the same share of the home's value as it was of its cost.
A TFSA adds nothing. The extra tax is that return less the same return without these amounts, so the year's own income is not taxed twice. Minimum tax does not apply in the year of death.[1]
What it leaves out
- Probate fees, which depend on the province and on how accounts are held.
- Beneficiary choices that move an RRSP or RRIF to a financially dependent child or grandchild.
- Splitting the deceased's own last-year income across two final returns in a couple.