Deemed Disposition at Death: How It Applies to Alberta Estates

Many Alberta families are surprised to learn that a death can trigger tax, even when nothing is sold. As executor, you will need to understand the idea of a deemed disposition because it shapes the final tax return.

This article explains the rule in plain terms and the main exceptions. The rules come from the federal Income Tax Act and apply the same way to Alberta property and investments.

This article covers the law of Alberta.

The basic rule

When a person dies, the CRA considers them to have sold all their property just before death, even though no sale occurs. This may create a capital gain or loss.

Under section 70(5) of the Income Tax Act, the deceased is deemed to have disposed of each capital property for proceeds equal to its fair market value at that time. The person who acquires it is deemed to acquire it at that same value.

How the gain is worked out and reported

The gain or loss is the fair market value on the date of death minus the adjusted cost base. The legal representative reports it on Schedule 3 and on line 12700 of the deceased's final return.

The CRA's capital gains inclusion rate is one-half. The planned increase was cancelled.

This is why records matter. For each asset, such as a home, cottage or investment account, you will want the value at death and what was originally paid.

The capital gains tax from the deemed disposition falls on the deceased's final return, so it is paid out of the estate rather than by the heir. A beneficiary who later sells an asset reports that sale on their own T1 return, using the fair market value from the final return as the starting cost.

Sales made by the estate after death are reported by the estate on a T3 return. The T3 is generally due 90 days after the trust's tax year-end, or the date of final distribution if the trust ceases to exist, and a late T3 may attract a penalty of $25 a day (minimum $100, maximum $2,500) even if nothing is owing.

Exceptions that can change the result

The spousal rollover requires the spouse or partner to be a resident of Canada at death and the property to be locked in for them no later than 36 months after death. The legal representative can also elect not to use the rollover, property by property, so that fair market value applies instead.

Other amounts on the final return

Amounts the deceased was owed but had not received, other than capital property, are included in final-year income at their value at death.

Net capital losses on the final return and the prior-year return can reduce other sources of income, not just capital gains.

Registered plans work in a similar way. The CRA considers an RRSP annuitant to have received the fair market value of all RRSP property just before death, and it is included in income in the year of death. For a RRIF, the full fair market value is likewise included. A named beneficiary does not pay tax again on an amount already included in the deceased's income, so the tax falls on the final return and is paid from the estate.

There are exceptions. If a spouse or common-law partner is the sole designated beneficiary of an RRSP and all the property is transferred to the spouse's own registered plan or eligible annuity by December 31 of the year after death, the annuitant is not considered to have received the fair market value. For a RRIF, the same applies if the spouse or partner is named successor annuitant, or is sole beneficiary and the property is transferred to a qualifying plan by that date. A spouse or common-law partner, or a child or grandchild who is financially dependent because of a physical or mental impairment, may be able to roll over a refund of premiums, with time limits and conditions. A child or grandchild who is not dependent can only move it into a term annuity.

Deadlines, penalties and clearance certificates

If the person died between January 1 and October 31, the final return and any balance owing are due April 30 of the year after death. If the person died between November 1 and December 31, they are due six months after the date of death. If the deceased or their cohabiting spouse or common-law partner carried on a business, the filing date is June 15 of the year after death for deaths from January 1 to December 15, and six months after death for deaths from December 16 to 31; payment is still due on the standard payment due date, and the later filing date does not apply if the business expenditures were mainly tax shelter investment costs.

A late final return with a balance owing attracts a penalty of 5% of the balance owing, plus 1% for each full month it is late, to a maximum of 12 months. The penalty may be higher if a late-filing penalty was assessed for any of the three previous years, and interest also applies to the penalty. Unpaid tax also bears compound daily interest from the day after the due date until it is paid in full.

Before distributing property under their control, the legal representative must obtain a clearance certificate. If they distribute without one, they can be personally liable for the amounts owing, up to the value of the property distributed.

The certificate is requested on Form TX19, and only after returns are filed and assessed and taxes are paid or secured, not together with the returns. The CRA sends an acknowledgement within 45 days, and assessment can take up to 120 days if all documents are provided. A certificate covers only the property known when it was requested, so assets found later need another one.

What to do next

• List every asset and find its value at the date of death.
• Find the original cost of each asset to work out the adjusted cost base.
• Note which assets pass to a spouse or partner, and whether the rollover applies.
• Collect records for any home, including what Form T1255 may require.
• Check the filing date for the final return based on the date of death.
• Hold off on distributing property until you have a clearance certificate.
• Speak with an accountant or lawyer before deciding on any rollover election.

Frequently asked questions