How Executors Handle Capital Gains on Death in Ontario

As an executor, you may be wondering what tax questions come up when the person who died owned a house, cottage or investments that have grown in value. People usually call this capital gains on death, or deemed disposition.

Whether and how much tax applies depends on what the deceased owned, what it cost, and which exemptions fit. This article focuses on what you, as executor, are legally responsible for around that tax, and when to bring in an accountant.

What people mean by capital gains on death

A capital gain is the increase in value of an asset such as real estate or investments over what was originally paid for it. Executors worry about this because property that has risen in value can raise tax questions at death, and how those questions apply depends on your situation, so it is worth confirming with an accountant.

The size of any gain, who owns the asset, and whether an exemption such as a principal residence exemption applies all depend on the facts. Those calculations are best done by an accountant who has the purchase records and valuations in hand.

Your duty to keep records

Estate trustees must keep accurate records of the estate's assets and transactions. If accounts are filed with the court on a first passing, they must include a statement of assets at the date of death, together with accounts of all money received and disbursed.

For tax purposes, records of value at the date of death and of original cost are what let your accountant work out the numbers.

• Purchase documents and closing statements for any real estate.
• Records of major improvements to the property.
• Brokerage and investment statements showing values at death.
• Appraisals or valuations obtained after the death.
• Property tax bills and any rental income records.

Which assets are in the estate

Not every asset the deceased used is part of the estate. For Estate Administration Tax, jointly owned assets that automatically become the survivor's are excluded, as are RPPs, RRSPs, RRIFs and TFSAs with a beneficiary designation. That is a different tax from income tax, but it shows why you should map out who owns what early.

Joint accounts can raise disputes. A gratuitous transfer from a parent to an adult child, including putting an account into joint names, is presumed to be held on resulting trust for the parent's estate. The presumption can be rebutted by evidence of the transferor's intention at the time of transfer, considering things such as bank documents, control and use of the funds, and tax treatment of the account. If you are unsure whether an asset belongs to the estate, ask a lawyer before reporting or distributing it.

Clearance certificate and personal liability

Before distributing any property, the legal representative of a deceased taxpayer must obtain a certificate from the Minister confirming that all tax amounts have been paid or that security has been accepted. If you distribute without it, you are personally liable for the unpaid tax, up to the value of the property distributed, and the Minister may assess you at any time.

The certificate is requested on Form TX19, Asking for a Clearance Certificate, after the required returns are filed and assessed and income taxes are paid or secured. Supporting documents include a statement of distributions made to date and a statement of the proposed distribution of any holdback or residual amount. An estate with a GST/HST number also needs Form GST352.

The rule applies to any distribution, including interim ones. How much to hold back depends on the facts, so ask your accountant rather than guessing.

Mistakes, compensation and next steps

Separately, the court may relieve a trustee who is personally liable for a breach of trust, wholly or partly, if the trustee acted honestly and reasonably and ought fairly to be excused for the breach and for not obtaining the court's directions. That rule is about breach of trust, and how it would apply to unpaid tax depends on your situation. That is not something to count on, so the better plan is to get advice before you distribute.

An estate trustee is also entitled to a fair and reasonable allowance for their care, pains, trouble and time, as allowed by a judge of the Superior Court of Justice. Tax work is part of that effort, so track your time.

• List every asset and how it was owned.
• Gather purchase records, valuations and statements.
• Hire an accountant to prepare the final return and any estate returns.
• Request the clearance certificate on Form TX19 once the returns are assessed and taxes are paid or secured.
• Hold distributions until the certificate is in hand.
• See a lawyer if beneficiaries dispute values or ownership.

Frequently asked questions