Capital Gains Tax on an Inherited House in Ontario

If a parent or relative left you a house, you may have heard that tax is due on it. Whether and when tax applies depends on what happens at death and what happens afterward, and it is usually the deceased's final return that carries the main reporting.

This article explains the basic tax steps for an inherited home in Ontario. It is general information, and an accountant should confirm the numbers for a real estate.

Deemed disposition at death

For income tax purposes, a person is treated as having sold all their property just before death. This deemed disposition can create a capital gain or loss on the home. No actual sale is needed. How this applies to you, and who ends up bearing any tax, depends on your situation, so it is worth confirming with an accountant or a lawyer.

Many homes were the deceased's principal residence, which can shelter some or all of the gain. That is covered below.

If the home goes 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 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 someone else

Where the home goes to anyone 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.

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.

Exception: if the owner was not a resident of Canada for the whole time they owned the property, the period of non-residence may reduce or eliminate the principal residence exemption, and CRA asks them to contact it. The CRA's reporting forms and instructions change, so have them confirmed for the year of death.

When the beneficiary later sells

If you keep the inherited house and sell it later, that sale is a separate event. How any later gain or loss is worked out depends on the value used at death and on whether the home qualifies as your own principal residence. An accountant can confirm this against the actual figures.

• The house's value at death and the sale price.
• Whether you lived in it, rented it or left it empty.
• Selling costs and any improvements you made.
• How long you held it after the death.

Tax clearance and other costs

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 a certificate can be personally liable for unpaid tax, up to the value of the assets distributed.

Capital gains tax is separate from Estate Administration Tax. For that tax, Ontario real estate is valued less encumbrances such as a mortgage, and there is no tax on estates valued at $50,000 or less for certificate applications on or after January 1, 2020; above that, the tax is $15 for every $1,000 of value.

What to do next

• Find out who inherits the home and whether they are a spouse or common-law partner.
• Get a value for the home as of the date of death.
• Collect records of how long the deceased lived in it and any periods away.
• Ask an accountant to prepare the final return and Schedule 3.
• Request a clearance certificate before distributing sale proceeds.

Frequently asked questions