Adjusted Cost Base on Inherited Securities: What an Ontario Beneficiary Needs to Know

Inheriting shares, mutual funds, or other investments from a family member raises a question almost nobody thinks to ask until they eventually sell: what did I actually pay for these? The honest answer is usually "nothing" — but for tax purposes, your ACB on inherited securities isn't zero. It's tied to a deemed transaction that happens automatically the moment the person who owned them dies.

Understanding this rule matters because it determines how much of a future sale will be taxable, and it can also affect the estate itself before the assets ever reach you.

Step 1: The Deemed Disposition at Death

When a person dies, the Income Tax Act treats them as having disposed of most of their capital property — including investments — immediately before death, at fair market value. This is called a deemed disposition. Any capital gain or loss that results is reported on the deceased's final tax return, not on the estate's return.

This deemed disposition is what "resets" the tax history of the investment. It's also why an estate trustee needs an accurate valuation of the deceased's investments as of the date of death, not just their original purchase records.

Step 2: Your ACB as the Beneficiary

Because the deceased is treated as having sold the investments at fair market value immediately before death, you — the beneficiary — generally inherit them with an ACB equal to that same fair market value. In effect, the original purchase price and holding period largely disappear from your side of the transaction; your cost base "steps up" (or down) to the value on the date of death.

This means if you sell shortly after inheriting, at close to the same value, you may have little or no capital gain to report — even if the deceased had held the investment for decades and it had grown substantially in value over that time.

Step 3: The Spousal Exception

There's an important exception. Property passing to a surviving spouse or common-law partner (or a qualifying spousal trust) generally rolls over automatically at the deceased's original ACB, rather than being revalued at fair market value — unless the estate elects out of the rollover. In that case, the deceased's final return doesn't report a gain on that property, but the surviving spouse inherits the original, lower ACB rather than a stepped-up one, meaning the eventual gain is simply deferred rather than eliminated.

Step 4: Multiple Beneficiaries and Valuation

When several beneficiaries share investment assets, each beneficiary's ACB is generally based on their proportionate share of the fair market value at the date of death. This makes an accurate, well-documented valuation important — not just for calculating the estate's own tax position, but for every beneficiary's future tax returns.

Where investments are transferred "in kind" (the actual securities, rather than cash from a sale), keep the valuation documentation the estate trustee prepared, since you'll need it as your ACB going forward.

What to Do When You Inherit Securities

1. Ask the estate trustee for the date-of-death valuation used for the deceased's final tax return.
2. Confirm whether the assets came to you directly (in kind) or were sold by the estate and distributed as cash — this changes what, if anything, you report.
3. Record the fair market value on the date of death as your new ACB for each security.
4. Keep the valuation documentation indefinitely, alongside any records of what you do with the investment afterward.
5. If you're a spouse inheriting under the rollover, confirm whether the estate elected out of it, since that changes your ACB entirely.

Frequently asked questions