Capital Gains on Inherited Property in Ontario: Beneficiary Basics

If you inherit a home or cottage, the tax question usually comes in two parts. First, what tax does the deceased's estate face at death? Second, what happens if you sell later? Many beneficiaries assume the answer to both is simple, and it often is not.

This article explains the main Canadian rules in plain language: the deemed disposition at death, how it sets the starting value for your sale, the exceptions for spouses and principal residences, and the clearance step that protects the person distributing the estate.

The deemed disposition at death

Capital property, including inherited houses and land, is treated as disposed of immediately before death at fair market value. Any gain or loss is reported on the deceased's final return, using Schedule 3. This happens even though no sale has taken place.

In plain words, the deceased is treated as if they sold the property for what it was worth at death. If the property has gone up in value since they bought it, there may be a gain to report on that return, and any tax is generally dealt with by the estate rather than by you personally. Most gifts and inheritances are not reported or taxed for the person who receives them.

How your cost base is set when you sell

A later sale by the beneficiary is measured against the fair market value reported on the deceased's final return. That value is effectively your starting point. If you sell for more, the difference is the gain to consider; if you sell for less, there may be a loss.

This is why a proper valuation at the date of death matters. A low or undocumented figure can create problems later, either on the final return or on your own sale.

What you do with the property between death and sale, such as renting it out or using it yourself, can change how it is treated. That depends on the facts, so confirm with an accountant.

Exceptions: spouses and principal residences

Property passing to a surviving spouse or common-law partner, or to a qualifying testamentary spousal trust, may result in no capital gain or loss on the final return. The property must vest in the spouse within 36 months of death.

For a home the deceased lived in, the principal residence exemption may cover some or all of the gain. Even when it covers the whole gain, the legal representative must still designate the home as a principal residence on the final return using Schedule 3 and Form T1255.

A cottage is often the harder case. Whether it, or a city home, qualifies as a principal residence, and for how many years, depends on the facts and on what the deceased owned, so this is a point to raise with an accountant early.

Clearance certificate and distribution

A legal representative should get a CRA clearance certificate (Form TX19) before distributing estate property. Anyone who distributes without one is personally liable for unpaid amounts, up to the value of the assets distributed. The application should be made only after returns are assessed and amounts are paid or secured.

If you are a beneficiary waiting for your share, this explains why the estate trustee may hold back funds until the tax picture is settled. If you are the estate trustee, it is a reason not to hurry the distribution.

What to do next

• Get a written appraisal showing fair market value at the date of death.
• Ask the estate trustee whether the final return has been filed and what value it reports.
• Confirm whether a principal residence designation was made on Schedule 3 with Form T1255.
• If a spouse or common-law partner is inheriting, ask whether the spousal rollover applies and whether the 36-month vesting rule is met.
• Keep records of any improvements or costs related to the property.
• Speak to an accountant before you sign a sale agreement, and to a lawyer about estate and title steps.

Frequently asked questions