Selling an Inherited House in Canada: Can You Claim the Exemption?

When a parent dies and leaves you their house, two separate tax events can follow. The first happens on the parent's final return. The second happens when you eventually sell. People often mix the two up and assume the parent's exemption simply passes to them.

This article explains how the two events fit together, when the exemption may be available to you as an heir, and what to ask an accountant or lawyer before you list the house.

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

What happens at death

A deceased person is considered to have sold all of their property just before death, and the principal residence designation applies only until the date of death. Even if the home is fully exempt, the executor must designate it on the final return using Schedule 3 and Form T1255.

There is an exception for spouses. If the home passes to a surviving spouse or common-law partner who is resident in Canada, or to a qualifying testamentary spousal trust, and vests within 36 months of death, the rollover applies and no deemed disposition arises. The legal representative can elect out, in which case proceeds equal fair market value immediately before death, and that election is made on the final return, property by property.

When your ownership begins

You acquire an inherited property on the date you obtain a right to possess it for your enjoyment. Your years of ownership start from that date, and the deceased's years of ownership do not carry over to you, except under the spousal rollover rules.

A spouse, former spouse or qualifying spousal or alter ego trust that acquires the home by transfer is treated as having owned it for the period the transferor owned it, so the transferor's designated years can count. A child who inherits does not get this treatment.

How your cost base is fixed following the deemed sale at death is a technical point. The estate's records, including any appraisal used on the final return, matter here, so confirm the figure with the accountant who prepared that return.

Can you claim the exemption on your own sale?

The home must be a housing unit you own and that is ordinarily inhabited in the year by you, your spouse or common-law partner, your former spouse or partner, or your child. Whether that is so is a question of fact. Even a short period of occupation can be enough, but where the main reason for owning is to earn income, a brief stay generally will not qualify.

If you moved in, the exemption may cover the years you lived there. If the house sat vacant or was rented while the estate was settled, the picture changes. If no qualifying person ordinarily inhabits the home in a year, a subsection 45(2) or 45(3) election can in some cases let it be treated as the principal residence for that year. Whether it applies to your situation depends on the facts.

Only one property per family unit can be designated for each year from 1982 onward, so consider any other home you or your family own.

Selling quickly after inheriting

A gain on a housing unit in Canada owned or held less than 365 consecutive days before disposition is deemed business income, and the principal residence exemption does not apply. This applies to dispositions after 2022.

There is an exception where the disposition can reasonably be considered to occur due to, or in anticipation of, the death of the taxpayer or a related person. A quick sale of an inherited home may fit, but it depends on the facts.

If there is a loss on sale, note that a home is personal-use property and the loss cannot be claimed. Where there is a gain, it is proceeds minus adjusted cost base and selling expenses, and half of it is taxable.

What to do next

• Find out the date you obtained the right to possess the house, since your ownership starts then.
• Keep the final return, any valuation used for it, and the T1255 designation.
• Record who lived in the house after death, and for how long.
• Count how many days you will have held the house before closing.
• Report the sale on Schedule 3 and complete Form T2091(IND) if you designate.
• Ask a lawyer or accountant before listing if the house was vacant or rented.

Frequently asked questions