- At death, a person is treated for income tax purposes as having sold all their property just before death, which can create a capital gain or loss on the home.
- All or part of the gain on a home passing to someone other than a spouse may be exempt as a principal residence, designated on Form T1255.
- The legal representative can be personally liable if assets are distributed before a clearance certificate is obtained.
Heirs often ask whether tax is owed when a parent's house passes to them. The tax rules treat the death as a sale, but that does not always mean a large bill.
This page explains the deemed disposition, how the principal residence exemption can help, and what the estate trustee generally needs to file. An accountant should confirm the numbers for your estate.
What the deemed disposition means
At death, a person is treated for income tax purposes as having sold all their property just before death. This deemed disposition can create a capital gain or loss on the home.
If the home goes to someone other than a spouse or common-law partner, the deemed disposition must be reported on Schedule 3 of the final return, and all or part of the gain may be exempt as a principal residence, designated on Form T1255. If the home passes to a spouse or common-law partner, no principal residence designation for the period before death is required on the final return.
The gain is also deferred if the property passes to a spouse or common-law partner, or to a spousal trust, and becomes locked in for them no later than 36 months after the date of death, and tax is then postponed until the survivor sells or is deemed to sell.
If the home passes to a spouse or common-law partner
The gain is deferred if the property passes to a spouse or common-law partner, or to a spousal trust, and becomes locked in for them no later than 36 months after the date of death. Tax is then postponed until the survivor sells or is deemed to sell.
The legal representative can elect out of the automatic spousal rollover on the final return, property by property. If they do, the cost to the spouse, common-law partner or spousal trust is the fair market value at death. For a principal residence passing to a spouse or common-law partner, no principal residence designation for the period before death is required on the final return.
If the home goes to a child or someone else
Where the home goes to someone other than a spouse or common-law partner, the deemed disposition must be reported on Schedule 3 of the final return. All or part of the gain may be exempt as a principal residence, designated on Form T1255.
| Who receives the home | Tax treatment |
|---|---|
| Spouse or common-law partner, or spousal trust | Gain deferred if locked in within 36 months of death, unless the representative elects out |
| Child or other person | Report on Schedule 3; all or part of the gain may be exempt as a principal residence on Form T1255 |
For dispositions in 2017 and later, a principal residence sale must be reported on Schedule 3 and Form T2091 (or Form T1255 for a deceased individual). Only page 1 of the form is needed if the property was the principal residence for every year owned, or every year but one.
If the owner was not a resident of Canada for the whole time they owned the designated property, the period of non-residence may reduce or eliminate the principal residence exemption, and CRA asks them to contact it.
Do not confuse this with Estate Administration Tax
Estate Administration Tax is a separate Ontario charge connected to the certificate application. Ontario real estate is valued less encumbrances on it, such as a mortgage, collateral mortgage or lien. Other debts such as lines of credit, credit cards and loans cannot be deducted, and neither can funeral expenses or lawyer's fees.
Capital gains tax and Estate Administration Tax are calculated differently, and a house can be fully exempt from one and still count toward the other.
Clearance certificates and next steps
A CRA clearance certificate, requested on Form TX19, confirms that the estate's income tax, GST/HST, interest and penalties owing up to the date it is issued have been paid or secured. Form GST352 is also needed if the deceased had a GST/HST number.
A legal representative who distributes assets, such as house sale proceeds, without first getting a clearance certificate can be personally liable for unpaid tax, up to the value of the assets distributed.
- Get a date-of-death value for the home, usually from an appraisal.
- Confirm who the home passes to, and whether that person is a spouse or common-law partner.
- Gather records showing the years the parent used the home as a principal residence.
- Ask an accountant whether a Form T1255 designation applies.
- Request a clearance certificate before distributing the sale proceeds.
- Do not distribute until the tax position is confirmed.
Frequently asked questions
Is there capital gains tax when a parent dies?
There can be. A person is treated as having sold their property just before death, which can create a capital gain or loss on the home. The principal residence exemption may cover all or part of it.
Does the exemption apply automatically?
No. All or part of the gain may be exempt as a principal residence, but it is designated on Form T1255. An accountant can confirm whether the home qualifies.
What if the home goes to the surviving spouse?
The gain is deferred if the property becomes locked in for a spouse or common-law partner no later than 36 months after death. The representative can elect out of that rollover on the final return.
Why do I need a clearance certificate?
It confirms that the estate's tax owing up to the date it is issued has been paid or secured. Without it, a representative who distributes assets can be personally liable for unpaid tax, up to the value of the assets distributed.
Sources
- Ontario.ca – Estate Administration Tax — ontario.ca
- CRA – Taxable capital gains on property, investments, and belongings — canada.ca
- CRA – Reporting the sale of your principal residence for individuals (other than trusts) — canada.ca
- CRA – Clearance certificate — canada.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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