Capital Gains on an Inherited Cottage in Ontario

A family cottage often has a low purchase price from decades ago and a high value today. When the owner dies, that difference can lead to a tax bill that surprises the family, and it is paid by the estate, not by the cottage itself.

This article explains in plain words how the tax rules treat a cottage at death and the main options an estate trustee and an accountant look at. Every estate is different, so use this as a map, not a prediction of your own bill.

The deemed disposition: a sale that never happened

For tax purposes, a person who dies is treated as having sold all their property just before death. This is called a deemed disposition, and it applies even though nobody actually sold the cottage.

Any gain or loss is reported on Schedule 3 and line 12700 of the deceased's final return. The estate trustee, whose job includes paying taxes and debts before distributing what is left, is responsible for dealing with this.

How the gain is worked out

The deemed proceeds are the fair market value of the capital property on the date of death. The gain is those proceeds minus the adjusted cost base.

How the heirs' own cost base is set for a later sale depends on the situation, so it is worth confirming with an accountant.

A written appraisal as of the date of death is a practical way to support the value you report. It also helps later, when an heir sells.

Cottage, principal residence and the family home

A cottage is personal-use property. Its gain is reported on Schedule 3, and a loss on personal-use property generally cannot be claimed.

A property that qualifies as a principal residence must still be designated on the final return, using Schedule 3 and Form T1255. The deceased's designation applies only until the date of death.

There is a trade-off. Only one property per family unit can be designated as a principal residence for any year after 1981, and the CRA's own example shows a cottage designated for certain years blocking the family house for those years. Choosing which property to designate for which years is a decision to make with an accountant.

Land size can matter too. Land up to one-half hectare generally counts as part of the residence, and excess land is treated as not contributing to the residence unless it was necessary for the use and enjoyment of the housing unit.

Options that may reduce or defer the tax

• Spouse or partner rollover: a transfer on death to a surviving spouse or common-law partner who is resident in Canada may produce no capital gain or loss on the final return, if the property is locked-in for them no later than 36 months after death.
• Electing out: the legal representative can elect out of the rollover property by property on the final return.
• Principal residence designation: if the cottage qualifies, it can be designated on the final return for the years before death, using Schedule 3 and Form T1255.
• Trust planning: a personal trust can claim the principal residence exemption only if it meets the trust rules, including specifying each year the beneficiaries who ordinarily inhabited the home.

Whether a rollover or an election is better depends on the whole picture, including the other income on the final return and what the family plans to do with the cottage. It is worth asking an accountant how any later tax would work.

Timing and what to do next

The final return is due April 30 of the following year if death occurs January 1 to October 31. If death occurs November 1 to December 31, it is due six months after the date of death. The payment due date for any balance owing does not move with the filing date.

• Get a date-of-death appraisal of the cottage.
• Collect the original purchase documents and records of major improvements.
• Find out whether the cottage was ever designated as a principal residence, and whether the family home also needs the designation.
• Check whether a surviving spouse or partner will receive the cottage.
• Ask an accountant to model the tax before anyone agrees to keep or sell.
• Keep enough funds in the estate to pay the tax before distributing.

A lawyer and an accountant working together can confirm the current inclusion rate and the numbers for your case.

Frequently asked questions