Fair Market Value at Date of Death for a Final Return in Canada

If you are the executor, one of your first tax jobs is putting a dollar value on what the person owned at the moment of death. That number decides how much gain, if any, shows up on the final return, and it also becomes the starting point for the people who inherit.

This article explains what fair market value means, where it is used, how it is approached for different kinds of property, and what to keep on file. It is general information; valuing a large or unusual asset is a good time to bring in a lawyer, accountant or qualified appraiser.

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

What fair market value means for a final return

The CRA describes fair market value as usually the highest dollar value you can get for property in an open and unrestricted market. It is not what the person paid, what the family hopes to get, or what a municipality assesses for property tax.

On death, a taxpayer is deemed to have disposed of each capital property immediately before death for proceeds equal to its fair market value. The tax on that deemed sale is carried by the final return, and there is no separate inheritance tax.

Why the value matters twice

The gain or loss is 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, not by the beneficiaries.

The same figure then sets the heir's cost. A person who acquires property because of the death is deemed to acquire it at its fair market value immediately before death. If the heir later sells, the gain or loss is generally the sale price minus the value reported on the final return, and current expenses such as maintenance and repairs cannot be added to the adjusted cost base.

In practice, a value that is too high can mean extra tax on the final return, and a value that is too low can leave the heir with a larger gain on a later sale. Neither is a good result, which is why a supportable number is worth the effort.

Valuing real estate, shares and other property

The right method depends on the asset. These are common approaches, offered as general background rather than fixed rules.

Not every asset is subject to the deemed sale in the same way. Property passing to a spouse or common-law partner can roll over at cost in some cases, and farm or fishing property passing to a child has its own rules, covered below.

Exceptions where the value is not simply the market price

• Spouse or common-law partner rollover: where property of a person resident in Canada passes as a consequence of death to a spouse or common-law partner resident in Canada, the deceased is deemed to dispose of it for its adjusted cost base instead (for depreciable property, the lesser of capital cost and cost amount), and the spouse takes it at that same amount.
• Qualifying spouse trust: the rollover can also apply to a Canadian-resident trust created by the will where the spouse is entitled to all the income for life and no one else can get income or capital during the spouse's lifetime.
• Timing condition: the rollover applies only if the property vests indefeasibly in the spouse or trust within 36 months after death, or a longer period the Minister allows on written application.
• Opting out: the legal representative may elect on the final return that the rollover not apply, property by property, so that proceeds are set at fair market value.
• Non-resident spouse: the rollover does not apply, and the ordinary deemed disposition at fair market value applies.
• Farm or fishing property passing to a child: the legal representative can choose deemed proceeds between the adjusted cost base (or cost amount) and fair market value, and the child takes the property at that amount.
• Resource property and land inventory are deemed disposed of at fair market value, with a separate spouse and spouse-trust rule that also requires vesting within 36 months.

What evidence to keep and what to do next

The CRA tells owners to keep records of the fair market value of property on the date they inherit it. What counts as enough support depends on the asset, so think of the file as the story of how you reached each number.

• Date of death, confirmed from the death certificate
• Appraisal reports, with the appraiser's name, qualifications and valuation date
• Date-of-death statements from banks, brokers and investment firms
• Comparable sales, listings or dealer letters used to reach a figure
• Original purchase records and improvement receipts to support the adjusted cost base
• Notes on any assumptions, discussions with the family and professional advice received

If the estate later sells an asset, gains on property the estate sells after death are reported on the estate's T3 return, not on the final return. Keep the date-of-death value and the sale details separate so each return tells a clear story.

Frequently asked questions