What does 'deemed disposition' on death mean for Canadian taxes?

Under Canadian federal tax law, a person is treated as having sold all their capital property at fair market value immediately before death. This is the "deemed disposition" rule. If assets like stocks, rental property, a cottage, or investments have increased in value since they were acquired, the accrued gain becomes taxable on the deceased's final (terminal) tax return.

Currently, a portion of a capital gain is included in taxable income as the "taxable capital gain" — the inclusion rate has varied over time and the specific rate in effect at the time of death will apply. A cottage or secondary property that was never a principal residence can trigger a large taxable capital gain on death. Your estate would be responsible for paying the resulting income tax.

There are important reliefs and deferrals available. Assets can roll over to a surviving spouse or common-law partner at cost, deferring the gain until the survivor's death. The principal residence exemption may shelter the family home. Registered accounts (RRSPs, RRIFs) have their own rules on death. An accountant familiar with estate matters can model the tax exposure before it arises.