How Are Non-Registered Investment Accounts Taxed at Death?

Ask MoneySense

With so much advice about estate planning for RRSPs and TFSAs, practical guidance on non-registered brokerage accounts can be harder to find. I’m looking to draw down my RRSPs and RRIFs tax-efficiently so the surviving spouse doesn’t face a large tax bill. I’ve been told you can’t name a beneficiary on a non-registered brokerage account and that it will go through probate. Is it better to avoid holding a large balance in a non-registered account? I currently have $450,000 there. Should I move the money into bank or credit-union GICs where I can name a beneficiary? Or should I sell stocks gradually to reduce potential tax after I die?

—Joe

During working years many investors prioritize tax deferral through registered plans like RRSPs. As retirement begins, decumulation and tax-reduction strategies become central. Planning to limit tax payable at death is an important part of estate planning—especially for those who want to preserve wealth for a surviving spouse or for descendants. Below is a practical overview of how different account types are taxed at death and considerations for non-registered brokerage accounts, GICs and beneficiary designations.

RRSP and RRIF tax treatment at death

If you leave an RRSP or a registered retirement income fund (RRIF) directly to your spouse or common-law partner, the transfer can usually be done on a tax-deferred basis. That means the surviving spouse can move the account into their own RRSP or RRIF without triggering immediate tax.

However, when the surviving spouse later dies, the RRSP/RRIF value is reported as income on their final return, effectively as if the balance had been withdrawn the day they died. If that year includes significant income from other sources, it can push the estate into a higher tax bracket and create a substantial tax liability.

TFSA at death

Tax-free savings accounts (TFSAs) are tax-sheltered: income, capital gains and withdrawals from a TFSA are not taxable. At death, the TFSA’s value as of the date of death is generally not taxable if the account is left to a spouse or common-law partner who is named as successor holder. If the TFSA is left to other beneficiaries, income or growth that accrues after death could be taxed, but the value at death itself is typically tax-free.

Non-registered account taxes at death

A non-registered account left directly to a spouse normally allows the accrued capital gains to be deferred. The spouse receives the investments at their adjusted cost base (ACB), meaning there’s no deemed disposition and no immediate tax on death.

Executors can choose to trigger capital gains partially or fully in the year of death. This can be beneficial if the deceased’s income that year is low, if they have deductions or credits, or if there are capital loss carry-forwards to offset gains.

If non-registered investments are left to beneficiaries other than a spouse—such as children—the usual tax rules apply: the investments are generally treated as sold at fair market value on the date of death, and any accrued capital gains are added to the deceased’s income. Depending on inclusion rates and marginal tax brackets, that tax can be meaningful.

GICs versus stocks in a non-registered account

Guaranteed investment certificates (GICs) do not produce capital gains, so there is no capital gains tax linked to an increase in market value at death. That may sound appealing, but it’s important to consider ongoing tax efficiency and long-term returns.

Interest from GICs is taxed fully in the year it is earned, which can be less tax-efficient than holding growth-oriented assets. Capital gains are taxed only on the realized gain and only 50% of the gain counts as taxable income; eligible Canadian dividends also receive favorable tax treatment. Over time, growth assets such as equities typically have higher gross returns and a portion of those returns can remain tax-deferred until sold.

For example, a GIC might yield lower annual returns that are fully taxed as interest, while a mix of dividends and capital gains from stocks could produce a higher after-tax estate value despite potential tax exposure at death. In many cases a tax-efficient growth strategy produces a larger estate after taxes than holding conservative, interest-bearing GICs annually taxed at ordinary rates.

Beneficiary designations

You can name beneficiaries for registered accounts—RRSPs, RRIFs and TFSAs—and you can often designate a spouse as successor annuitant or successor holder so those accounts transfer directly without probate. For non-registered GICs held at some financial institutions, you may be able to name a beneficiary, but most non-registered brokerage accounts themselves do not accept beneficiary designations that bypass probate.

An exception is guaranteed income annuities or guaranteed interest annuities considered insurance products; these often allow beneficiary designations. Note that naming a beneficiary may avoid probate costs and speed distribution, but it does not change the underlying tax treatment of the asset at death.

Probate versus income tax

Probate is the court process that validates a will and allows an executor to distribute assets. Probate fees and administration costs vary widely by province and territory. While probate costs are a consideration in estate planning, for most people income tax on death—particularly tax triggered by deemed dispositions or by registered account rules—has a larger impact on the net estate value than probate fees.

A key point: avoiding probate does not avoid income tax. Structuring accounts to reduce probate might speed transfers or save fees, but tax planning is a separate and often more significant element.

Practical guidance for your non-registered account

In short, Joe: moving all funds into GICs solely to eliminate capital gains at death may reduce probate exposure in some cases, but it also lowers long-term growth potential and can increase annual tax drag because interest is fully taxable each year. Holding a well-constructed, tax-efficient mix of investments in your non-registered account is often a better way to grow the estate for beneficiaries, even if some tax is payable later.

Consider these practical steps: review the beneficiary and successor designations on your registered accounts; consult with your executor or estate advisor about whether partial realization of capital gains in the year of death would be advantageous; and evaluate the trade-offs between guaranteed interest products and growth investments in terms of after-tax, after-probate estate value. A financial planner or tax advisor can model scenarios using your specific balances, income projections and provincial rules to identify the best course for your goals.