What is deemed disposition at death and how does it work in Canada?
This answer covers Canadian federal tax law, which applies in every province.
Deemed disposition at death means the tax rules treat the person who died as having sold their capital property just before death, at its fair market value, even though nothing was actually sold. Any resulting gain or loss is worked out as fair market value on the date of death minus the adjusted cost base, and it is reported on Schedule 3 and line 12700 of the final return.
The deceased's final return carries this tax, not the beneficiaries, and there is no separate inheritance tax. The person who inherits the property is treated as acquiring it at that same fair market value, which becomes their adjusted cost base. Gains on property the estate sells after death are reported on the estate's T3 return instead.
Property passing to a spouse or common-law partner resident in Canada, or to a qualifying spouse trust, can roll over at its adjusted cost base, if it vests within 36 months after death. A principal residence may be fully or partly exempt, but it must still be reported on Schedule 3. A lawyer or accountant can confirm how this applies to your situation.
Key takeaways
- The person who died is treated as having sold each capital property just before death at its fair market value.
- The gain or loss goes on Schedule 3 and line 12700 of the deceased's final return, not on the beneficiaries' returns.
- The person who receives the property is treated as acquiring it at its fair market value at death, which sets their adjusted cost base.
- Property going to a spouse or common-law partner resident in Canada, or to a qualifying spouse trust, can roll over at its adjusted cost base, and the legal representative may elect out of that rollover.