Does the Estate Pay Tax on a Gain After Death in Canada?

You are the executor and the house, shares or cottage is about to be sold. The price may be higher than it was on the date of death, and you want to know who pays tax on what, and on which return.

The short answer is that Canada taxes two different periods separately. Gains up to the moment of death belong on the final return, and growth after death belongs to the estate. Knowing the split helps you avoid reporting the same gain twice.

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

Two periods, two returns

On death, a person is deemed to have disposed of each capital property immediately before death for proceeds equal to its fair market value. The final return carries this tax, not an inheritance tax. The gain or loss is the fair market value on the date of death minus the adjusted cost base, reported on Schedule 3 and line 12700 of the final return.

The deceased reports that gain on the final return, not the beneficiaries. After death, income the estate earns and gains on property the estate sells are reported on the estate's T3 Trust Income Tax and Information Return, with capital gains on T3 line 1 using T3 Schedule 1.

A simple way to see the split

So the gain up to death is reported on the final return, and gains on property the estate sells after death are reported on the estate's T3 return. How the estate's own gain is worked out on a particular sale depends on the facts, so it is worth confirming with a lawyer or accountant.

Why the date-of-death value matters

A person who acquires property because of the death is deemed to acquire it at a cost equal to its fair market value immediately before death. That sets the heir's 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. Current expenses such as maintenance and repairs cannot be added to the adjusted cost base.

The CRA describes fair market value as usually the highest dollar value you can get for property in an open and unrestricted market, and it tells owners to keep records of the value on the date they inherit. How much evidence supports a value, such as an appraisal for a house or private company shares, depends on the property. Ask a lawyer or accountant what is sensible for your estate.

Exceptions that change the result

• Spouse or common-law partner: where property passes to a spouse or partner resident in Canada as a result of death, the deceased is deemed to dispose of it at its adjusted cost base (for depreciable property, the lesser of capital cost and cost amount), and the spouse takes it at that same amount. This applies only if the property vests indefeasibly in the spouse within 36 months after death, or a longer period the Minister allows on written application.
• Spouse trust: the same rollover can apply to a qualifying trust created by the will. The property must vest indefeasibly within 36 months after death, or a longer period the Minister allows on written application.
• Non-resident spouse: the rollover does not apply, and the ordinary deemed disposition applies.
• Opting out: the legal representative may elect on the final return that the rollover not apply, property by property.
• Farm or fishing property passing to a child: the representative can choose deemed proceeds between the cost amount and fair market value.
• Principal residence: the gain may be fully or partly exempt, but it must still be reported on Schedule 3 and designated, and the designation covers only years up to death. Which CRA form is used for the designation is worth confirming with a lawyer or accountant.

What to do next

• List every capital property and note its adjusted cost base.
• Record the fair market value on the date of death for each one.
• Keep sale documents so post-death growth can be separated from the pre-death gain.
• Check whether a spouse rollover, the home exemption or farm rules apply before selling.
• Plan for the T3 return, which is due 90 days after the trust's year-end.
• Before distributing, get a clearance certificate, since an executor who distributes without one can be personally liable.

Because the pre-death and post-death calculations interact, speak with a lawyer or accountant before listing a high-value property.

Frequently asked questions