Capital Gains Tax on Inherited Property: What the Heir Pays in Canada

If you have inherited a house, shares or other property, you may worry that selling it will bring a large capital gains bill based on what the deceased paid many years ago. In most cases it does not work that way.

This article explains what happens at death, how your cost base is set as the heir, and how a later sale is taxed. Spouses, farm property and other special cases can differ, so the end of the article points to when advice is worth getting.

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

Tax is generally triggered at death, not on inheritance

When someone dies, the deceased is considered to have sold their capital property.

Receiving the property is not itself a sale for you. Compare this with a gift made during life: a gift of capital property, other than to a spouse or common-law partner, is treated as a sale at fair market value on the date of the gift, so the giver reports the gain or loss.

Your cost base as the heir

Inherited property generally costs the heir the deceased's deemed proceeds of disposition, which is usually fair market value just before death. That value becomes your adjusted cost base (ACB) for a later sale.

Because of this, the growth that happened during the deceased's lifetime is generally not taxed again in your hands. Your gain on a sale is measured from the value at death. Keep the valuation or appraisal used for the final return, since it supports your cost base.

Tax when you sell later

A gain is calculated by subtracting the ACB and the outlays and expenses of selling from the proceeds of disposition. The taxable capital gain is one-half of the capital gain. If your taxable capital gains exceed your allowable capital losses, the difference is added to your other income and taxed at your marginal rates.

If the value has not changed much since death, there may be little or no gain. If it has fallen, you may have a capital loss, and net capital losses can be applied only against taxable capital gains. Report the sale in the calendar year it occurs, and file a return even if no tax is owing.

If the inherited property is a home you sold, or are considered to have sold, include Form T2091(IND) with your return and report the sale on Schedule 3. Whether the principal residence exemption is available depends on your own facts.

Cases that can be treated differently

When someone dies, they are considered to have sold their capital property, and the heir's cost is generally the deceased's deemed proceeds of disposition, usually fair market value just before death. Spousal or common-law partner transfers and certain farm or woodlot transfers to a child can be treated differently from that general rule. A gift or transfer of capital property to a spouse or common-law partner during your life is a separate situation. It generally happens at ACB with no gain or loss, although if the spouse later sells the property, the gain is generally attributed back to the transferor.

• Property left to a spouse or common-law partner may follow special rules.
• Certain farm or woodlot property passing to a child may follow special rules.
• Property you hold jointly or through a trust may raise further questions that depend on how it is held.

What to do next

• Ask the executor for the fair market value used for each asset in the deceased's final return.
• Keep that valuation, along with legal and sale-related expense records, with your tax files.
• Check whether the property passed to you through a special rule, such as a spousal or farm transfer.
• Before selling, ask a lawyer or accountant whether any tax is still open at the estate level.
• Report the sale on Schedule 3 for the year it occurs.

Frequently asked questions