Capital Gains When You Sell Inherited Property in Canada

When someone dies and leaves you a house or investments, you may wonder whether you owe capital gains tax when you sell. The answer depends on what the property was worth at death and what you later sell it for, not on what the deceased originally paid.

This article explains the cost base you generally receive, how the later gain is calculated and what to report. Every estate is different, so use it as a starting point.

This article covers Canadian federal tax law, which applies in every province.

What happens at death

For tax purposes, the deceased is considered to have sold their capital property at death. Inherited property generally costs the heir the deceased's deemed proceeds of disposition, which is usually fair market value (FMV) just before death.

That deemed sale is treated as the deceased's sale, not a sale by you, and your own tax picture starts with the cost you inherited. How the deemed sale is reported for the estate depends on the facts, so it is worth confirming with a lawyer or accountant.

There are exceptions. Spousal or common-law partner transfers and certain farm or woodlot transfers to a child can be treated differently.

Calculating your gain on a later sale

The gain is your proceeds of disposition minus your ACB and your selling outlays and expenses. For inherited property, your ACB is generally that FMV at death. Commissions and legal fees to acquire property can be part of the cost, but current expenses such as maintenance and repairs cannot.

To see the arithmetic, the CRA gives an example of 400 shares sold for $6,500 with a $60 commission and a $4,000 ACB. That produces a gain of $2,440, of which half ($1,220) is the taxable capital gain reported on line 12700. Your own numbers will differ, since your ACB would generally be the value at death.

If the result is a gain, the taxable capital gain is added to your other income on line 12700 and taxed at your marginal rates. The one-half rate applies to gains realized in 2024, 2025 and 2026. If the result is a loss, it can be used only against taxable capital gains, carried back three years or forward indefinitely.

Inherited investments and houses

For shares or fund units of the same kind, an average ACB is used and is recalculated at each purchase. Changes to that cost can also arise from return of capital, shown in box 42 of a T3 slip. Gains or losses shown on T3, T4PS, T5 or T5013 slips are generally reported on line 17400 or 17600 of Schedule 3.

If you sell only part of an inherited property, the ACB is divided between the part you sell and the part you keep. If the sale is in a foreign currency, proceeds are converted at the exchange rate at the time of the sale, and the ACB at the rate when the property was acquired.

If you sell a house, you report the sale on Schedule 3. If you sell or are considered to have sold your principal residence, include Form T2091(IND) with your return. Whether the house qualified as your own principal residence depends on the facts, so confirm that before assuming there is no tax.

If you sold a Canadian housing unit owned for less than 365 consecutive days, the gain is deemed business income and not a capital gain, unless a qualifying life event applies, such as death. Ask an advisor how that applies if you sell quickly.

Reporting the sale

• Report the sale in the calendar year it happens and file a return even if no tax is owing.
• Use Schedule 3, Part 3 with proceeds, ACB, outlays and the resulting gain or loss.
• Carry a positive result to line 12700.
• Report amounts in Canadian dollars.

If you sell inherited investments at a loss and you or an affiliated person, such as your spouse or common-law partner, buys the same or identical property within the period from 30 days before to 30 days after the sale and still holds it, the loss may be a superficial loss. A superficial loss cannot be deducted and is usually added to the cost base of the substituted property. Certain situations, such as the owner becoming a non-resident or the owner's death, are not treated as superficial losses.

What to do next

• Ask the executor for the valuation used for the date of death, since your cost is generally tied to the deemed proceeds, usually FMV just before death.
• Keep an appraisal or valuation record for the date of death.
• Record any costs you paid to sell, such as commissions and legal fees.
• Check whether any spousal or farm exception could change your cost.
• Confirm with a lawyer or accountant before selling if the estate is not yet settled or the property is large.

Frequently asked questions