Is Capital Gain on a Deceased Person's Home Taxable in BC?

When someone dies owning a house in British Columbia, heirs often worry that a large tax bill will land on the family. The answer depends on how the home was used, who receives it, and what the executor reports on the deceased's final tax return.

This article explains in plain terms how the deemed sale on death works, when the principal residence exemption helps, and which situations (rental property, cottages, spousal transfers) are treated differently. Every estate is different, so a lawyer or accountant should confirm how this applies to yours.

This article covers the law of British Columbia.

Death is treated as a sale, even if nothing is sold

Under section 70(5)(a) of the Income Tax Act, a person is deemed to have disposed of each capital property immediately before death, for proceeds equal to its fair market value at that time. The CRA describes this as the deceased being considered to have sold everything just before death, even though no sale takes place.

The gain is the fair market value less the adjusted cost base. It is reported on Schedule 3, and the taxable portion goes into income on line 12700 of the final return. The final return covers income from January 1 of the year of death up to the date of death.

This is why a getting a clear, supportable value for the home as of the date of death matters. Many families ask for a written valuation at that stage.

The principal residence exemption

If the home was the deceased's principal residence, the gain may be fully exempt. Even then, the home must still be designated on Schedule 3 and on Form T1255 in the final return. The deceased's designation applies only up to the date of death, and land is usually limited to half a hectare unless more was needed for the home's use as a residence.

If the home passes to a spouse or common-law partner on a rollover, the gain is reported as zero and a pre-death designation is not required in the final return. A record of the years the deceased could have designated should still be kept.

Property that is not a principal residence

• Rental property and vacant land are reported on Schedule 3 and are not treated as a principal residence.
• Recapture of capital cost allowance, or a terminal loss, on rental property is reported on Form T776.
• A cottage used for personal enjoyment is personal-use property reported on line 15800, and a loss on it cannot be claimed.
• Losses on listed personal property (art, jewellery, rare books, stamps, coins) can offset gains from the same category.

On death, net capital losses from the final return or the prior year can offset income other than capital gains, which is not the case in other years.

Passing the home to a spouse or common-law partner

Under section 70(6), capital property that vests indefeasibly in a spouse or common-law partner resident in Canada within 36 months after death (or a longer period the Minister allows on written application) is deemed disposed of at its adjusted cost base. No gain arises on the final return, and the spouse takes over the cost.

The legal representative can choose to elect out of the automatic rollover, property by property, in the final return. Transfers to a qualifying testamentary spousal trust can also be tax-deferred. Whether to elect out is a planning question worth discussing with an accountant, because the gain would then be taxed on the final return.

What to do next

• Gather the deed, purchase records, and records of major improvements to help establish the adjusted cost base.
• Get a valuation of the home as of the date of death.
• Confirm whether the home was the deceased's principal residence and for which years.
• Check whether the home is going to a spouse or common-law partner, and whether an election out of the rollover makes sense.
• Have the legal representative file the final return with Schedule 3 and Form T1255 where they apply.
• Speak with a lawyer or accountant before the home is sold or transferred, since what happens on a later sale depends on the facts.

Frequently asked questions