Capital Gains Tax When an Estate Sells a Parent's Home in Ontario

You are the executor, or estate trustee, of a parent who has died, and the family home has to be sold. Before you list it, you probably want to know whether the sale will trigger tax, and on whose return it will show up.

The answer has two parts. The first is what the tax rules treat as happening at the moment of death. The second is what happens when the estate sells afterward. Keeping the two apart makes the rest much easier to follow.

Death is treated as a sale, even if no one has sold anything

Under the Income Tax Act, a deceased taxpayer is treated as having sold each capital property immediately before death, for proceeds equal to its fair market value. Whether your parent's home counts as capital property in their situation depends on the facts, so it is worth confirming with an accountant.

If the home increased in value since your parent bought it, that increase is the gain that the rules look at. The question is whether the principal residence exemption wipes it out. That is why the date-of-death value of the home matters so much, and why a proper appraisal is worth arranging early.

There is a different treatment if the property passes to a spouse, common-law partner or qualifying spousal trust. In that case it can pass at the deceased's adjusted cost base if it vests in that person within 36 months after death, and the legal representative can elect out of that treatment. How this applies if the home is going to someone else, such as a child, depends on your situation, so it is worth confirming with an accountant.

The principal residence exemption on the final return

The CRA says the deceased's principal residence designation applies only until the date of death. Even when the whole gain is exempt, the legal representative must still designate the home on the final return, using Schedule 3 and Form T1255. The exemption is allowed only if the disposition is reported on the return on Schedule 3 with the designation form.

In other words, the exemption is not automatic. It depends on the home being reported and designated on the return.

A few details can affect how much of the property qualifies:

• Land counted as part of a principal residence is generally limited to half a hectare (1.24 acres), unless more is needed for the home to function as a residence.
• A property can qualify if the deceased owned it alone or jointly.
• If your parent owned another property, such as a cottage, you should have an accountant look at which one was designated, because the designation is made on the return.
• You cannot claim a capital loss on personal-use property. If the house sold for less than it was worth, that loss is not available to reduce other gains.

When the estate sells the home after death

If the estate or trust sells the property after death, the gain goes on line 1 of the T3 return. The CRA describes it as generally the sale price minus the fair market value reported on the final return, with disposition costs factored in.

This is why a quick sale at close to the date-of-death value often produces little or no further gain. If the home sells for much more than its value at death, for example because the sale drags on in a rising market, the difference is a gain that belongs to the estate.

Whether the estate can shelter that later gain with a principal residence designation depends on the type of trust and the facts. Treat a post-death gain as taxable unless your accountant confirms that a qualifying designation is available.

Which return reports what

Deadlines and other costs to keep in mind

For a death from January 1 to October 31, the final return and payment are due April 30 of the following year. For a death from November 1 to December 31, both are due six months after death. If the deceased operated a business, the filing date is June 15, but the payment date does not move.

A T3 return is due no later than 90 days after the trust's tax year-end, and any balance owing is due then too. On winding up a graduated rate estate, the tax year ends on the date of final distribution.

Capital gains tax is separate from Ontario's Estate Administration Tax. For certificates applied for on or after January 1, 2020, that tax is $15 for every $1,000 (or part thereof) of estate value over $50,000, and nothing is owed on an estate of $50,000 or less. Real estate is valued at its appraised value on the date of death, less encumbrances such as a mortgage or lien. Credit cards and lines of credit cannot be deducted.

Confirm the current rate before you file, since rates can change.

What to do next

An estate trustee is the only person with legal authority to manage or distribute an estate. Part of the job is paying taxes, bills and debts, collecting assets and distributing what is left. Taxes owing on the home are part of that duty. A sensible order of work looks like this:

• Get a written appraisal of the home as of the date of death.
• Collect the purchase records, renovation receipts and any records of how the home was used.
• Find out whether your parent owned any other property that could be claimed as a principal residence.
• Ask an accountant whether the home passes to a spouse or spousal trust, which changes the analysis.
• Calendar the final return due date based on the date of death.
• Prepare Schedule 3 and Form T1255 for the final return, even if you expect no tax.
• Keep sale documents and selling costs, since they affect the T3 calculation.
• Talk to a lawyer before you sign the sale, because a land transfer by an estate trustee requires specific statements about authority and spousal rights.

A lawyer and an accountant can confirm how these rules apply to your parent's particular situation, including the value of the home, the timing of the sale and who inherits it.

Frequently asked questions