Deemed Disposition at Death in Alberta: How the Tax Works

If you are an executor or a beneficiary in Alberta, you may hear that the deceased is treated as having sold everything. That can sound alarming, especially when the family plans to keep the house, the cottage or the investments.

This article explains in plain words what the deemed disposition is, which property it affects, how the spousal rollover works, and who ends up paying. Federal tax rules apply the same way across Canada, so this is the same in Alberta as elsewhere.

This article covers the law of Alberta.

What a deemed disposition is

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 a capital loss.

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

The gain or loss is the fair market value on the date of death minus the adjusted cost base. The CRA's capital gains inclusion rate is one-half, and the planned increase was cancelled.

Who reports it and who pays

The legal representative reports the gain or loss on Schedule 3 and line 12700 of the deceased's final return. A final return must be filed for every person who dies.

The tax from the deemed disposition falls on the final return, so it is paid out of the estate and not by the heir. If a beneficiary later sells the property, they report that sale on their own T1 using the fair market value from the final return as their starting cost.

Sales made by the estate after death are reported by the estate on a T3 return. The estate may also need to file a T3 trust return, and a late T3 may attract a penalty even if nothing is owing.

The spousal rollover and other special cases

Property passing to a Canadian-resident spouse, common-law partner or qualifying spousal trust is deemed disposed of at adjusted cost base instead of fair market value, and the recipient takes that cost. The spouse or partner must be a resident of Canada at death, and the property must be locked in for them no later than 36 months after the date of death.

The legal representative can elect in the deceased's return not to use the rollover, so the deemed disposition at fair market value applies instead. The election is made property by property.

Related items that are taxed at death

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

RRSP and RRIF property works in a similar way: the fair market value is included in income in the year of death, with exceptions for a spouse or common-law partner and certain other qualifying survivors.

• Beneficiaries are generally taxed only on amounts paid to them that the estate deducts.
• A named RRSP or RRIF beneficiary does not pay tax again on an amount already included in the deceased's income.
• A home may be exempt in whole or in part, so it is worth checking before assuming tax is owing.

What to do next

Before you distribute anything, think about timing and the clearance certificate. The legal representative must obtain a clearance certificate before distributing property under their control, and if they distribute without one they are personally liable for the amounts owing, up to the value of the property distributed.

• List each asset with its fair market value at the date of death and its adjusted cost base.
• Note which assets pass to a spouse or common-law partner and whether to elect out of the rollover.
• Identify any home, farm or fishing property that may need special reporting.
• Request the clearance certificate on Form TX19 only after the returns are filed and assessed and taxes are paid or secured.
• Speak to a lawyer or accountant about the election, the final return and the estate's T3 filings.

Frequently asked questions