Capital Gains Tax at Death: How Ontario Estates Are Taxed

If you are inheriting a cottage or an investment portfolio, you may be surprised to learn that a tax bill can arise before anything is sold. Canadian tax law treats the deceased as having sold each of their capital properties at fair market value immediately before death.

This article explains the basic rule, the main exceptions and the dates the estate trustee needs to watch. Every estate is different, so an accountant or lawyer should confirm how this applies to your situation.

What deemed disposition means

Under the Income Tax Act, a person is deemed to have disposed of each capital property immediately before death at its fair market value. Any resulting capital gain is reported on the final return.

In plain words, nothing has to be sold for the rule to apply. The estate trustee works out what each asset was worth on the date of death, compares that with what the deceased originally paid, and reports the difference. Because the gain is reported on the final return, it is worth getting the tax picture clear before any distribution is made.

Exceptions that can defer the tax

The general rule has some important exceptions. The main ones are:

• Spouse, common-law partner or qualifying spousal trust: property of a Canadian-resident deceased that passes to them rolls over at cost. The property must vest indefeasibly within 36 months after death, and the representative may elect out of the rollover.
• Farm or fishing property to a child: a rollover may apply to Canadian land and property used mainly in a farming or fishing business. The child must have been resident in Canada at the death, and the property must vest in the child within 36 months.

A rollover generally postpones the tax rather than removing it, because the person who receives the property takes it at the deceased's original cost. Whether you qualify depends on details such as residency and how the property is transferred, so confirm with an accountant before relying on one.

Cottages, homes and personal-use property

Many families are most worried about a cottage. The deceased's principal residence designation applies only up to the date of death. If the property gained value over the years and no rollover applies, a gain may have to be reported.

There is also a limit on losses. You cannot claim a capital loss on personal-use property. Whether a loss could be used on a particular property depends on how it was used, so confirm this with an accountant.

Where a cottage is not covered by a rollover, the deemed disposition at fair market value still applies, and any resulting capital gain is reported on the final return. If a cottage is shared among several heirs, or the family wants to keep it, the plan for ownership and tax is worth discussing with a lawyer and an accountant early.

Filing dates for the final return

In the business case, any balance owing is still due by the regular date. Note the dates early so the estate does not fall behind.

Protecting the estate trustee: what to do next

A legal representative who distributes assets without a CRA clearance certificate, requested on Form TX19, while tax is owing is personally liable for the unpaid amounts, up to the value of the assets distributed. That is a strong reason to hold back distributions until the tax picture is settled.

• Gather the date of death and any records of what each asset originally cost.
• Get date-of-death values for investments, land and the cottage.
• Identify who is receiving each asset, and whether a spouse, common-law partner or spousal trust is involved.
• Note the final return deadline for the date of death.
• Ask an accountant about rollovers and a lawyer about the estate trustee's duties.
• Request the clearance certificate before distributing.

Frequently asked questions