Capital Gains on Joint Property After a Co-Owner Dies in Ontario

When a co-owner of a house, cottage or investment property dies, it is natural to think survivorship settles everything. Ownership may pass cleanly to you, but tax is a separate question. The deceased person's final income tax return is where the tax result shows up.

This article explains the general way capital gains are treated on death, how joint ownership fits in, and where a spouse or a principal residence can change the result. Your numbers will depend on the facts, so an accountant or lawyer should confirm them.

Passing by survivorship is not the same as avoiding tax

Property held in true joint tenancy passes straight to the surviving owner and does not go into the estate, whether or not there is a will. That affects who owns the property and whether probate is needed. It does not switch off income tax.

Under the Income Tax Act, a deceased person is considered to have sold all of their capital property just before death. This may produce a capital gain on their final return, and it applies even if the property passes by survivorship.

In practice, that means a tax result can show up on the deceased's final return even though the survivor already owns the property. Ask an accountant how the deceased's share should be measured for your situation.

Spouses and common-law partners: the rollover

Property transferred to a surviving spouse or common-law partner who is resident in Canada can roll over without an immediate gain under ITA s. 70(6). The property must be locked in for them within 36 months of death.

A rollover generally defers the gain rather than erasing it. The practical point is that the tax result for a spouse can look very different from the result for a child or friend who inherits the same asset.

Note that the spouse who owns property jointly may also have other rights, such as an equalization election if the couple were married. That is a family law question and is separate from the tax rollover.

The principal residence exemption

Some or all of the gain on a principal residence may be exempt, using a designation on Form T1255. Whether the whole gain is exempt depends on facts such as how the property was used, so this is worth confirming with an accountant.

A house that was also a rental, or a second property such as a cottage, may need a closer look. How the designation applies when a family owns more than one property depends on your situation, so it is worth confirming with an accountant.

Different situations at a glance

Adding a child to title: when tax can come into play

Many families add a child to a parent's property to avoid probate. If you give capital property as a gift, you are considered to have sold it at fair market value when you give it, and you must report any capital gain for that year.

The automatic rollover for gifts under ITA s. 73(1) applies to a spouse or common-law partner, not to children, except for qualifying farm or fishing property.

Putting a child on title can also create ownership disputes. A court may presume that an adult child added to a parent's asset without paying holds it in trust for the parent, and on death for the estate, unless a gift is shown.

What to do next

• Find out how title was held by getting the deed or parcel register.
• Gather the purchase price, any improvement costs and a recent value for the property.
• Note whether the survivor is a spouse or common-law partner and whether the property was the deceased's home.
• Ask an accountant how the deceased's final return should deal with the property, and whether a Form T1255 designation is relevant.
• Speak with an accountant about the capital gain and a lawyer about ownership questions.

Frequently asked questions