- A gain on the deceased's home may be fully or partly exempt, but the property must still be reported on Schedule 3 and designated.
- The gain is fully exempt only if the home was the principal residence for all years owned, or all but one, with no other property designated.
- Heirs generally take the home at its value at death and measure later gains or losses from that figure, except that a home passing to a spouse or common-law partner resident in Canada can roll over at the deceased's adjusted cost base.
If you are the executor of someone's estate, the family home is often the largest asset. A common question is whether the principal residence exemption still applies once the owner has died.
The answer is often yes, in full or in part, but it is not automatic. The home still has to be reported, and the exemption depends on how many years it was the principal residence and whether other properties were designated.
This article covers Canadian federal tax law, which applies in every province.
The home is treated as sold at death
On death, a taxpayer is deemed to have disposed of each capital property immediately before death for proceeds equal to its fair market value. That includes the home. The gain or loss is the fair market value on the date of death minus the adjusted cost base.
A gain on the deceased's home may be fully or partly exempt, but the property must still be reported on Schedule 3 and designated. The CRA says the designation covers only years up to the date of death.
When the gain is fully exempt, and when it is not
A home's gain is fully exempt if it was the principal residence for all years owned, or all but one, and neither the owner nor a family member designated any other property as a principal residence for those years.
The exemption formula in section 40(2)(b) of the Income Tax Act is gain A − (A × B/C) − D. Here B counts the years the property was the taxpayer's principal residence, with a one-year adjustment where the taxpayer was resident in Canada in the year of acquisition. C counts the years of ownership after acquisition. This is why part of the gain can be taxable if the home was not the principal residence for enough years.
- Home was the principal residence every year, or all but one: fully exempt, if no other property was designated for those years.
- Home was the principal residence for only some years: the formula may leave part of the gain taxable.
- Home was the principal residence for no years: the formula gives no exemption for it.
Cottages and second properties
A cottage or second property cannot be designated for a year in which another property of the family unit is designated. Where a family owns a home and a cottage, only one can be designated for each year, so part of the deemed gain on the other may be taxable on the final return.
If the deceased owned both, the executor generally needs to compare the two properties' gains and years of ownership. An accountant can help work out which designation gives the better result.
Selling the house or passing it to heirs
Whoever acquires the property because of the death is deemed to acquire it at fair market value immediately before death. That sets their adjusted cost base. A beneficiary who later sells generally calculates gain or loss as the sale price minus the value reported on the final return.
If the estate sells the house after death, gains on that sale are reported on the estate's T3 return, not the final return. Current expenses such as maintenance and repairs cannot be added to the adjusted cost base.
If the home passes to a spouse or common-law partner resident in Canada, the rollover can apply and the home is treated as transferred at the adjusted cost base. It applies only if the property vests in the spouse or a qualifying spouse trust within 36 months of death, or a longer period the Minister allows. The executor may instead elect that the rollover not apply, property by property. If the election is made, the regular deemed-disposition rule applies and proceeds are set at fair market value on the final return. Whether the principal residence designation helps in that case depends on the home's years of use, so it is worth confirming with an accountant or lawyer.
What to do next
- Get the date-of-death value of the home and keep the records.
- Find the original purchase price and any records of improvements.
- List every year the home was the principal residence.
- Find out whether any other property, such as a cottage, was designated for the same years.
- Report the home on Schedule 3 and complete the designation form.
CRA materials refer to Form T1255 for designating a deceased person's home and to Form T2091(IND) in its general capital gains guide. Confirm the correct form with an accountant or lawyer before filing.
Frequently asked questions
Is the deceased's home automatically tax-free?
No. A gain may be fully or partly exempt, but the property must still be reported on Schedule 3 and designated. Whether it is fully exempt depends on the years it was the principal residence.
Can the estate designate years after the date of death?
The CRA says the designation covers only years up to the date of death. What happens after death is dealt with by the estate or the heir, depending on who holds the property.
What if the family owned a home and a cottage?
Only one property can be designated for each year, so part of the gain on the other may be taxable on the final return.
What is an heir's cost if they sell the house later?
The heir is generally treated as acquiring the house at its fair market value at death. A later gain or loss is the sale price minus that value.
Sources
- Income Tax Act, s. 70 — Justice Laws (federal)
- CRA – Doing taxes for someone who died: Capital gains — canada.ca
- CRA – Doing taxes for someone who died: Capital gains / Report income — canada.ca
- CRA – Guide T4037, Capital Gains — canada.ca
- Income Tax Act, s. 40(2)(b) — Justice Laws (federal)
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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