Can Property Pass to a Spouse Without Tax Through the Spousal Rollover in Canada?

This answer covers Canadian federal tax law, which applies in every province.

Yes, in many cases. When capital property passes because of death to a spouse or common-law partner who was resident in Canada, the usual deemed sale at fair market value does not apply. Instead, the deceased is treated as selling at the adjusted cost base (for depreciable property, the lesser of capital cost and cost amount), so no gain is triggered, and the spouse is treated as acquiring it at that same amount. The tax is deferred, not erased.

The rollover applies to a trust created by the will, resident in Canada, if the spouse is entitled to all the trust's income for life and no one else can receive income or capital during the spouse's lifetime. The property must vest indefeasibly in the spouse or trust within 36 months after death, or a longer period the Minister allows on written application. A spouse who was not resident in Canada immediately before the death does not qualify.

The legal representative can choose to opt out on the final return, property by property, so the regular deemed sale applies instead. That can help use the deceased's losses, the capital gains deduction, or lower rates. This depends on the facts, so confirm it with a lawyer or accountant.