Death & taxes: Lessons for dentists

A recent news story described an Ontario family who was shocked when their parents passed away within the same year and the estate owed more than $660,000 in taxes. The children expected to inherit a cottage and retirement savings, but much of the money went straight to the Canada Revenue Agency.

This wasn’t a mistake. It was the normal application of Canadian tax rules that many people don’t fully understand. And it’s an important cautionary tale for dentists, who often have significant assets in corporations, investments, and real estate.

What happened

Both parents died in the same calendar year, about 11 months apart.
They had around $715,000 in registered retirement savings (RRSPs/RRIFs). When the second parent died, there was no spouse to roll these over to, so the entire amount was taxable as income in one year.
They also owned a cottage that had appreciated significantly over the years. It had only been designated as the principal residence for the last few years, which meant earlier gains were exposed to capital gains tax.
With no rollover and a deemed “sale” of the cottage at death, the combined tax on the estate came to roughly $660,000.
To keep the cottage, the children used almost all of the RRSP money to pay the CRA.

Why the tax bill was so high

Canada doesn’t have an inheritance tax per se, but it does tax assets aggressively when someone dies:

RRSP/RRIFs at death – If there’s no spouse, dependent child/grandchild to transfer to, the entire balance is included as income in the year of death. In this case, the $715,000 was taxed at very high marginal rates.
Capital gains on property – At death, you’re deemed to have sold property at its fair market value. If it isn’t fully sheltered by the principal residence exemption, the gain is taxable. The cottage gain added significantly to the bill.

When both parents passed so close together, everything was triggered at once with no opportunity to spread the taxes out.

Don’t misunderstand this: RRSPs are still powerful

Stories like this sometimes leave people thinking they should avoid RRSPs altogether. That would be a mistake.

RRSPs remain one of the most effective planning tools available because:

Contributions are made while you’re in a higher tax bracket, saving you significant tax upfront.
Growth inside an RRSP is tax-deferred, meaning all of the investment income and gains compound without annual tax drag.
In retirement, most people draw from their RRSPs slowly over decades, often at lower average tax rates than when they contributed.

The reason this case blew up into such a large bill is because both parents died in the same year and didn’t implement a RRSP meltdown strategy before hand, which collapsed decades of tax-deferral into a single year. For the vast majority of people, RRSPs remain a cornerstone of a sound retirement and tax strategy.

How this could have been avoided or reduced

There were options that could have made this situation much less painful:

Draw down RRSPs gradually – Taking more out of registered accounts earlier in retirement, even if it means paying some tax then, can reduce the huge tax hit when both spouses are gone. This is especially relevant if one spouse is ill.
Use TFSAs more aggressively – Growth inside a TFSA is tax-free during life and at death, making it a much better vehicle for passing on wealth.
Plan the principal residence exemption – Families with both a city home and a cottage should carefully plan which property to designate as the principal residence. Filing elections properly can save significant tax.
Consider insurance – A joint-last-to-die life insurance policy specifically sized to cover expected estate taxes can provide liquidity so that heirs don’t need to sell assets or drain registered funds. For dentists with corporations, having the policy owned by the corporation can create tax-free funds through the Capital Dividend Account.
Trusts and ownership structures – For those 65 and older, alter-ego or joint-partner trusts can help with probate planning and continuity, although they don’t eliminate tax. They do provide more control and clarity.

Why this matters for dentists

Dentists are in a unique position because they often:

Have professional corporations with retained earnings.
Own holding companies with investments.
Buy real estate, both for practice premises and as investments.

All of these factors add complexity, but they also provide more tools for planning. For example:

Your corporation can own insurance that pays tax-free proceeds into the Capital Dividend Account, helping heirs cover estate tax.
Coordinating dividends from your corporation with RRSP withdrawals can smooth income and avoid bracket spikes.
Properly structuring ownership of practice property can reduce probate fees and ensure continuity.
And much more.

Lessons from the $660,000 case

There is no “inheritance tax” in Canada, but death does trigger tax on RRSPs/RRIFs and capital gains.
When both spouses die in close succession, the second death accelerates all the taxes at once.
Illiquid assets like cottages are emotionally important but can create liquidity crises without planning.
Dentists have more tools than most Canadians to plan for these issues, but those tools need to be used deliberately.
RRSPs are not the enemy. They remain one of the best ways to save, shelter growth, and plan for retirement.

Final takeaway

The most important step is building an ongoing relationship with your advisor and professional team. This isn’t a “one-time” conversation you have five years before retirement. Life changes, tax rules change, and your goals change. At minimum, revisit your estate and retirement plan once a year with your advisor to ensure your strategy evolves with you. Proactive planning is the only way to prevent your estate from facing a surprise tax bill like this family did.

About the author:

Gurtej Varn is a wealth advisor specializing in serving early to mid-career dentists. His firm, White Coat Financial Inc., offers a full suite of services.

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