How Is Capital Gains Tax Handled on a Deceased Person's Home That Was Not Their Principal Residence in Ontario?

When someone dies, they are treated as having sold each capital property, including a cottage or rental property, at fair market value immediately before death, and this can trigger capital gains on the final return. Who ends up bearing any tax depends on the estate and the will, so it is worth confirming with an accountant or lawyer.

There are important exceptions. Property left to a spouse or common-law partner resident in Canada, or to a qualifying spousal trust, generally rolls over at cost, so no gain or loss arises on the final return, provided the property vests in the spouse or trust within 36 months after death, although the legal representative may elect out of the rollover. Qualifying farm or fishing property can roll over to a child resident in Canada, and the definition of child includes grandchildren and great-grandchildren. A house held in an alter ego, joint partner or spousal trust follows different timing, because the trust has the deemed disposition.

A principal residence may be fully or partly exempt, but the legal representative must still designate it using Schedule 3 and Form T1255. A family can shelter only one home per year. Current tax rates change, so confirm figures with an accountant.