How are capital gains handled when I inherit property in Canada?

In Canada, there is no separate "inheritance tax" or "estate tax." However, the federal Income Tax Act provides that on death, the deceased is deemed to have disposed of all capital property at fair market value immediately before death. Any resulting capital gain is reported on the deceased's terminal T1 tax return and the tax must be paid from the estate.

As a beneficiary, you inherit the property at its fair market value as of the date of death — this becomes your adjusted cost base going forward. You do not owe tax on the accrued gain up to the date of death (that was taxed on the terminal return). If you later sell the property for more than your inherited cost base, you will owe capital gains tax on the additional gain at that time.

An exception applies to transfers to a surviving spouse or common-law partner, where the spousal rollover can defer the deemed disposition until the surviving spouse sells or dies. The estate's legal representative and the beneficiaries should work together with a tax professional to determine whether to elect into or out of the spousal rollover and how to report the deceased's terminal return accurately.