Estate Sold the Home After Death: Who Pays Tax on the Gain in Ontario?

An estate trustee in Ontario often sells the deceased's home, cottage or investments some months after the death. If the price is higher than what the property was worth at death, a natural question follows: is there tax on the gain, and who pays it?

The short answer is that the tax usually splits into two stages. The deceased's final return deals with the deemed sale at death, and the estate deals with growth after death. This article walks through how that works so you know what to expect before the sale closes.

Why the date-of-death value matters

For tax purposes, a person is deemed to have disposed of each capital property immediately before death, at its fair market value at that time. The person who acquires the property generally takes that fair market value as their cost. CRA treats the deceased as having sold everything just before death, even if nothing was actually sold.

Capital property includes homes and cottages, investments such as stocks, mutual funds and crypto-assets, and belongings such as art, collections and jewellery.

The result is that the estate starts with a cost equal to the date-of-death value. If the estate sells later, the gain is generally measured against the fair market value reported on the final return, and the costs of selling are taken into account. Growth after death is therefore the estate's gain, not the deceased's. This is why a sound, documented valuation at death is worth getting.

Reporting the gain on the T3 return

A gain on a sale after death is reported on line 1 of a T3 Trust Income Tax and Information Return. Only the taxable portion of a capital gain is included in income, and the capital gains inclusion rate is one-half. The proposed increase to two-thirds was cancelled.

A T3 return is generally filed for the estate if it realizes any gain or receives any payments after the death. A return may not be needed if the estate was distributed right after the death and earned no income before then.

• The T3 return and any balance owing are due no later than 90 days after the trust's tax year-end.
• When the estate is wound up, its tax year ends on the date of the final distribution, and the final T3 return and any balance are due no later than 90 days after that date.

Does the principal residence exemption help?

Usually not for gains after death. For tax years after 2016, a personal trust can designate a principal residence only if it is one of four types: an alter ego, spousal or common-law partner, joint spousal or similar settlor-lifetime trust; a qualified disability trust; a trust for a minor child of a deceased parent; or a trust for a qualifying individual eligible for the disability tax credit. A beneficiary, or that beneficiary's spouse, former spouse or child, must also have ordinarily inhabited the home.

A typical estate is not one of those trusts, and the home is often empty during the sale, so the exemption often does not shelter the estate's gain. Whether a particular estate qualifies depends on its terms and the facts, and is worth confirming with a lawyer or accountant.

The final return is a separate matter. The home must still be designated as a principal residence on the final return, even if the designation exempts the whole gain. The legal representative completes Schedule 3 and Form T1255.

If the home passes to a surviving spouse or common-law partner, no principal residence designation for the period before death, and no deemed disposition or gain, has to be reported on the final return. The representative should keep records of the years the deceased could have designated.

Who pays: the estate or the beneficiaries

Amounts the estate allocates to beneficiaries are deducted from the trust's income and generally included in the beneficiaries' income, reported to them on T3 slips with a T3 Summary. Income the estate keeps is taxed in the estate.

The rate depends on the type of estate. A graduated rate estate is the estate that arose on and as a consequence of death, for up to 36 months.

Provincial tax applies in addition to federal tax. Ontario income tax also includes a surtax and the Ontario Health Premium, so a quick estimate that ignores them will understate the tax. An accountant can run the real numbers.

If the estate sells for less than the date-of-death value

Sometimes the sale price is lower. Under ITA s. 164(6), the legal representative can elect to treat certain capital losses and terminal losses of a graduated rate estate as losses of the deceased for the final tax year. CRA describes the current window as the estate's first tax year.

A proposed change would extend this to the estate's first three tax years for deaths on or after August 12, 2024, but it is proposed, not enacted. How this applies depends on your situation, so it is worth confirming with an accountant early.

Before you distribute the sale proceeds

Every legal representative other than a trustee in bankruptcy must obtain a clearance certificate from the Minister before distributing property under their control. A representative who distributes without one is personally liable for the unpaid amounts up to the value of the property distributed, and the Minister can assess at any time.

• Get a date-of-death valuation of the home and any investments.
• File the final T1 return, including Schedule 3 and Form T1255 for the home where required.
• File the T3 return reporting the sale, and pay any balance owing by the due date.
• Once all returns are filed and assessed and amounts are paid or secured, file Form TX19.
• Wait for the certificate before paying out the proceeds. CRA acknowledges the request within 45 days, and the assessment can take up to 120 days if the documents are complete.

The certificate covers only amounts owing when it is issued. If more assets are found later, another certificate is needed before distributing them. A lawyer or accountant can help you sequence the sale, the returns and the distribution.

Frequently asked questions