Can Capital Gains Tax Be Reduced or Deferred When Someone Dies With a Large Estate in Canada?
This answer covers Canadian federal tax law, which applies in every province.
Yes, in some situations, but the options depend on who inherits and what the property is. On death, the person is treated as having sold each capital property just before death at fair market value, and the tax is reported on the final return.
The main option is the spousal rollover: property passing to a spouse or common-law partner resident in Canada, or to a qualifying spouse trust, is treated as sold at its adjusted cost base, so no gain is triggered at death. A non-resident spouse does not qualify. The property must vest in the spouse or trust within 36 months, or a longer period the Minister allows on written application, and the legal representative can elect out, property by property, to use losses or lower rates. Other reliefs include the principal residence exemption, which must still be designated on Form T1255, and the lifetime capital gains deduction for qualified small business shares or farm or fishing property.
Net capital losses in the year of death can offset other income, and a graduated rate estate may elect to treat some of its later losses as the deceased's. Which option fits depends on the facts, so confirm with a lawyer or accountant.
Key takeaways
- On death, capital property is treated as sold at fair market value just before death, and the tax is carried on the final return.
- A spouse or common-law partner resident in Canada, or a qualifying spouse trust, can receive property on a rollover at cost, if it vests within 36 months.
- The legal representative can elect out of the rollover property by property, which may help use losses, the capital gains deduction or lower rates.
- A home may be fully or partly exempt but must still be reported and designated, and a second property such as a cottage may be partly taxable.