Capital Gains Tax When Someone Dies Owning Property in BC

When someone dies owning a house, a cottage, investments or a business, the tax result can be a surprise. There is no sale, yet the tax system may treat the property as if there were one. As the executor, you are the person who has to report it.

This article walks through how the final return treats property, when a rollover applies, and what to gather. It covers federal tax rules as they apply to a British Columbia estate. An accountant or lawyer should confirm how they apply to your situation.

This article covers the law of British Columbia.

What deemed disposition means

Property is generally treated as disposed of just before death at fair market value, and any gain is reported on the deceased's final return. This is called a deemed disposition. It happens even if nothing is sold and the property goes straight to a beneficiary.

The legal representative must file the final T1 return, and a T3 return may be needed for the estate. How a gain is worked out depends on the property and its history, so keeping purchase and valuation records is worth doing.

The spousal rollover

The capital gain can be deferred when property is transferred to a surviving spouse, common-law partner or a qualifying spousal trust, and this is elected on the final return. The tax is then generally postponed rather than removed. The surviving partner may face it later.

If the property goes to anyone else, such as a child, how the gain is handled depends on your situation, so it is worth confirming with an accountant or lawyer before the final return is filed.

The principal residence question

Many people ask whether the family home is taxed. Whether an exemption for a principal residence applies, and how much of any gain it covers, depends on how the property was used and owned over the years. This article does not set out the conditions. Ask an accountant to review the home before the return is prepared.

How a home is reported on the return depends on your situation, so it is worth confirming with an accountant before the return is filed.

Registered plans and other income

Not every item is a capital gain. Different assets are reported in different ways:

If a beneficiary designation is invalid, the named beneficiary has died, or the estate is named, a plan benefit may be payable to the estate. That affects who receives the money and can affect the probate fee base, so check the designations early. Assets that pass directly to someone else, such as by right of survivorship or a valid designation, are outside the probate fee definition, but that is a separate question from tax.

A plan participant may designate another person to receive a benefit as a designated beneficiary, although those rules do not apply to a contract of insurance governed by Part 3 or 4 of the Insurance Act. A designation cannot be changed after payments start unless the plan terms permit. How a particular plan is treated is worth confirming with the plan administrator or an accountant.

Jointly held land with a right of survivorship passes to the survivor rather than to the personal representative. If joint tenants cannot be shown to have survived each other, or die simultaneously, each is deemed to have held the property or joint account as tenants in common, so a deceased's share can pass through the estate. How a joint holding is taxed depends on the facts, so ask an accountant.

What to do next

• List all property the deceased owned at death and note who inherits each item.
• Gather purchase records, improvements and fair market value information as of the date of death.
• Confirm whether a surviving spouse, common-law partner or spousal trust will receive any property, because that affects the rollover election.
• Collect statements for RRSPs, RRIFs and TFSAs.
• Ask the Canada Revenue Agency or an accountant about the due dates for the final return and any T3 return, and confirm with an accountant or lawyer how the tax owing may affect when you distribute the estate.

Probate fees are a separate cost from income tax. The probate fee is based on the gross value of the estate, not on gains. Because the legal representative files the final return, it is wise to involve an accountant and a lawyer together before you distribute assets.

If you apply for a grant, the applicant files an affidavit of assets and liabilities, which is Form P10 for a domiciled estate. If the deceased was not domiciled or ordinarily resident in BC and property outside BC will be administered abroad, Form P11 may be used instead. If you later find assets not referred to in the affidavit, you must promptly file a supplemental affidavit and pay all related fees.

Frequently asked questions