Tax When an Estate Sells Property After Death in Canada

You are the executor and an asset, perhaps a house, a cottage or a portfolio of shares, is sold some months after the death. The price is higher than it was on the date of death. You want to know who pays tax on that extra growth and on which return it goes.

The short answer is that the tax is split in two. Growth up to the date of death is handled on the deceased's final return. Growth after death is handled by the estate. Knowing where that line falls keeps you from reporting the same gain twice or in the wrong place.

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

Two separate periods, two separate returns

On death, the deceased is deemed to have disposed of each capital property immediately before death for proceeds equal to its fair market value. Canada does not have a separate inheritance tax: this deemed disposition is how the tax is collected, and it appears on the final return.

The CRA describes the gain or loss as the fair market value on the date of death minus the adjusted cost base. It is reported on Schedule 3 and line 12700 of the final return, and it is reported by the deceased on that return, not by the beneficiaries.

Income the estate earns after death, and gains on property the estate sells after death, are reported on the estate's T3 Trust Income Tax and Information Return rather than on the final return.

Who reports what

How the post-death gain is worked out

A person who acquires property because of the death is deemed to acquire it at the time of death at a cost equal to its fair market value immediately before death. That sets the starting cost for later sales. In practice, the estate's gain on a sale after death is generally the growth above that date-of-death value, because the earlier growth was already taxed on the final return.

The CRA says a beneficiary who later sells inherited property generally calculates the gain or loss as the sale price minus the fair market value reported on the final return. Current expenses such as maintenance and repairs cannot be added to the adjusted cost base.

Fair market value is usually the highest dollar value you can get for property in an open and unrestricted market, and owners are told to keep records of the value on the date they inherit. Because the date-of-death value drives both returns, a well-supported figure is worth the effort. Whether the estate or a beneficiary is the one who sells depends on how the property is dealt with, so confirm this before filing.

Exceptions and losses to watch for

• Property transferred as a consequence of death to a spouse or common-law partner resident in Canada is generally deemed disposed of at its adjusted cost base, not its fair market value, and the spouse takes it at that same amount.
• The legal representative can elect out of that rollover, property by property, so that fair market value applies instead.
• A principal residence gain may be fully or partly exempt, but the property is still reported on Schedule 3 and designated on Form T1255.
• If a graduated rate estate disposes of capital property in one of its first three taxation years and its capital losses exceed its gains, the legal representative may elect to treat part of the excess as the deceased's loss on the final return, which must then be amended.

That last rule matters if the estate sells at a loss after death. Without the election, the loss stays with the estate. The election has a deadline tied to the estate's filing due date, so raise it early with an accountant or lawyer.

What to do next

• Collect valuations or other records that support fair market value on the date of death.
• Keep the sale documents and any costs of selling for the estate's T3 return.
• File the T3 return by 90 days after the trust's year-end. A late T3 can bring a penalty of $25 per day, with a minimum of $100 and a maximum of $2,500, even if no tax is owing.
• Do not distribute property until you have a clearance certificate from the Minister, requested on Form TX19. Without it, you can be personally liable for unpaid amounts up to the value of what you distributed.

If the estate holds a business, a cottage or shares in a private company, the numbers and elections can get complicated. An accountant or lawyer can confirm the right treatment before you sell.

Frequently asked questions