What is a deemed disposition and how does it affect an estate in Ontario?

A deemed disposition is a rule under Canadian federal tax law (administered by CRA) that treats a taxpayer as having sold all their capital property at fair market value immediately before death, even though no actual sale occurred. This means the deceased's estate may owe capital gains tax on the increase in value of investments, a cottage, rental property, or a business interest — even if those assets were simply left to beneficiaries.

The resulting capital gain (or loss) is reported on the deceased's final T1 tax return. The principal residence exemption can shelter capital gains on the family home, provided the property was the deceased's principal residence for the years owned. RRSPs and RRIFs are subject to their own deemed income inclusion rules rather than the capital gains rules.

For estates with significant investment portfolios, real estate other than a primary residence, or business interests, the deemed disposition can generate a large tax liability. Estate planning during a person's lifetime — including the use of trusts, corporate structures, and spousal rollovers — can manage or defer this liability. An accountant experienced in estate taxation should be consulted.