The Adjusted Cost Base of Inherited Property in Canada, Explained

If you've inherited a cottage, a stock portfolio, or a piece of land, one of the first tax questions you'll eventually face is: what did it cost, for tax purposes, when you received it? You never paid for it, so there's no purchase receipt to point to. The answer lies in a concept called adjusted cost base, and getting it right determines how much capital gains tax you'll owe when you eventually sell.

This isn't usually a pressing question the day you inherit something. It becomes urgent the day you sell — and by then, the records that establish the right number can be much harder to find.

What "Adjusted Cost Base" Means

Adjusted cost base, often shortened to ACB, is the number the Income Tax Act uses as your starting point for calculating a capital gain or loss when you eventually dispose of a capital property. For something you bought yourself, it's generally your purchase price plus certain costs of acquisition. For something you inherited, there was no purchase — so the law needs a different starting point.

The General Rule: Fair Market Value at Death

As a general rule, when someone dies, they are treated as having disposed of their capital property immediately before death at its fair market value at that time (a "deemed disposition"). The flip side of that rule is that the person who inherits the property generally receives it with an adjusted cost base equal to that same fair market value — not what the deceased originally paid for it.

In practical terms, this means the appreciation that happened during the deceased's lifetime is generally accounted for on the deceased's own final tax return (as a capital gain, if any), and the beneficiary starts fresh with a cost base reflecting the value at the date of death. Any further appreciation from that point forward is the beneficiary's own capital gain when they eventually sell.

The Exception: Spousal Transfers

Where property passes to a surviving spouse or common-law partner, an automatic rollover generally applies instead: the property transfers at the deceased's original adjusted cost base, not fair market value, and the resulting capital gain is deferred until the surviving spouse eventually disposes of the property (or dies). This is a deliberate exception, tied specifically to a spousal or common-law partner relationship — it doesn't extend to other relatives or beneficiaries.

Worked Example (Illustrative Only)

Illustrative figures — not real tax figures, for concept only:

• A parent bought a cottage decades ago for $80,000 (their original ACB).
• At the date of the parent's death, the cottage is worth $500,000 (fair market value).
• The parent's estate reports a capital gain of $420,000 ($500,000 − $80,000) on the parent's final return, and a portion of that gain is taxable.
• The child who inherits the cottage now has an adjusted cost base of $500,000 — not $80,000.
• If the child later sells the cottage for $520,000, their own capital gain is $20,000 ($520,000 − $500,000), not $440,000.

Always use your own documented figures, not this illustration, and confirm the applicable inclusion rate and any available exemptions with an accountant.

Why This Matters When You Eventually Sell

Because the deceased's own appreciation was generally already dealt with through the deemed disposition on death, using the deceased's original purchase price as your cost base — instead of the date-of-death value — would effectively double up the tax on the same growth. This is one of the more common and costly mistakes beneficiaries make when they eventually sell an inherited property years later and can't easily find documentation of what it was worth when they received it.

Getting a proper valuation or appraisal at, or close to, the date of death, and keeping it on file indefinitely, is one of the most useful things a beneficiary can do to protect themselves.

Special Cases Worth Flagging

• Principal residence: If the deceased used the property as their principal residence, some or all of the gain on the deemed disposition may be sheltered by the principal residence exemption — but the sale still needs to be reported.
• Jointly held property: Only the deceased's share of a jointly held property is subject to the deemed disposition; the surviving joint owner's own original share and cost base are unaffected.
• Property held in a trust for a beneficiary: Where property passes into a trust rather than directly to an individual, the cost base rules can work differently depending on the type of trust and how it's structured — this is a case where general rules stop being reliable and specific advice becomes necessary.

Frequently asked questions