Electing Out of the Spousal Rollover on a Final Return in Canada

When someone dies leaving capital property to a spouse or common-law partner, the tax law usually defers the tax. That is helpful in many estates, but it is not always the best result on the final return.

The legal representative has a choice that can switch the deferral off for particular properties. This article explains the default rule, its conditions, how the election works and the situations where electing out may make sense.

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

What the default spousal rollover does

Normally, a person is treated as having sold each capital property just before death at its fair market value, and the tax on that is carried by the final return rather than by an inheritance tax. The person who acquires the property because of the death is treated as acquiring it at that same value.

The spousal rollover changes this. When property is transferred or distributed as a consequence of death to a spouse or common-law partner who is resident in Canada, the deceased is treated as disposing of it for proceeds equal to its adjusted cost base, or for depreciable property the lesser of capital cost and cost amount. The spouse is treated as acquiring it at that same amount.

The rollover also applies to a Canadian-resident trust created by the deceased's will, if the spouse is entitled to all the trust's income for life and no one else may receive income or capital during the spouse's lifetime.

Conditions for the rollover

• The deceased must have been resident in Canada immediately before death, and the spouse or common-law partner must also have been resident in Canada.
• A non-resident spouse does not qualify, and the ordinary deemed disposition at fair market value applies.
• The property must vest indefeasibly in the spouse or trust within 36 months after death, or a longer period the Minister allows on written application.

Special rules apply to some property, such as resource property and land inventory, and to farm or fishing property passing to a child, so those need separate review.

How the s. 70(6.2) election works

The legal representative may elect, in the final return for the year of death, that the rollover not apply, so that the regular deemed-disposition rule applies instead. The CRA says the election is made property by property, and proceeds are then set at fair market value.

That means you can leave some properties on the rollover and elect out for others. Where you elect out, the gain or loss is fair market value on the date of death minus adjusted cost base, reported on Schedule 3 and line 12700 of the final return, and it is reported by the deceased rather than by the beneficiaries. The spouse then takes the property at fair market value, which gives a higher cost base for a later sale.

When electing out can make sense

The election can be useful to use the deceased's losses, the capital gains deduction, or lower rates on the final return. Each reason works differently.

For the capital gains deduction, the CRA's figures show a limit of $1,250,000 for dispositions on or after June 25, 2024, indexed to inflation. Confirm that this amount is enacted before relying on it. Also verify the current capital gains inclusion rate on canada.ca.

What to do next

The election is made in the final return, so it needs to be decided before filing. Filing deadlines depend on the date of death and on whether a business was carried on.

• List each property passing to the spouse or a spouse trust, with its fair market value and adjusted cost base.
• Keep records of fair market value at the date of death.
• Gather the deceased's net capital loss history and any capital gains deduction information.
• Confirm the 36-month vesting requirement can be met.
• Compare the tax on the final return with the lost deferral and the spouse's higher cost base, property by property.

Frequently asked questions