Inherited Property in Canada: What Is Your Cost Base When You Sell?

You have inherited shares, a cottage or another investment, and now you are thinking about selling it. One of the first questions is how much of the sale price will be taxed. The answer starts with your cost base, which is not what the person who died originally paid in most cases.

This article explains how that cost base is set, how it connects to the tax return filed for the person who died, and two situations where the result is different: a sale by the estate itself, and property passing to a spouse or common-law partner. Your own facts matter, so a lawyer or accountant can confirm how this applies to you.

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

How the cost base of inherited property is set

Canada does not have an inheritance tax. Instead, on death the person is deemed to have disposed of each capital property immediately before death for proceeds equal to its fair market value. The tax on any resulting gain is carried by the final return of the person who died.

The other side of that rule is what matters to you. 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 (Income Tax Act, s. 70(5)(b)). That figure sets your adjusted cost base, often shortened to ACB.

How the final return connects to your later sale

The CRA explains that the person who died is treated as having sold all property just before death, which can create a gain or loss. That gain or loss is the fair market value on the date of death minus the adjusted cost base, and it is reported on Schedule 3 and line 12700 of the final return. The gain is reported by the deceased on the final return, not by the beneficiaries.

When you later sell inherited property, the CRA says you generally calculate your gain or loss as the sale price minus the fair market value reported on the final return. In other words, the tax on growth up to the date of death was dealt with on the final return, and your sale only picks up the change in value after that.

What you can and cannot add to your cost base

The CRA states that current expenses such as maintenance and repairs cannot be added to the adjusted cost base. If you inherit a cottage and paint it or fix the dock before selling, those costs generally do not increase your ACB.

• Your starting ACB is generally the fair market value immediately before death, except that a spouse or common-law partner who receives the property under the rollover takes over the deceased's ACB instead.
• Your gain or loss is generally the sale price minus the fair market value reported on the final return.
• Ordinary maintenance and repairs are not added to the ACB.
• Whether any other cost can be added depends on the facts, so confirm it with an accountant or lawyer.

Two situations that change the result

If the estate sells the property after death, the result is different. Gains on property the estate sells after death are reported on the estate's T3 Trust Income Tax and Information Return, with capital gains on T3 line 1 using T3 Schedule 1, and not on the final return. This matters if the executor sells the cottage or shares before they are transferred to you.

The second situation is the spousal rollover. Where property of a taxpayer resident in Canada immediately before death is transferred or distributed as a consequence of death to a spouse or common-law partner resident in Canada, the usual rules in s. 70(5)(a) and (b) do not apply. The deceased is deemed to dispose of the property for proceeds equal to the ACB, and the spouse is deemed to acquire it at that same amount. So a spouse who receives the property this way takes over the deceased's ACB (or, for depreciable property, the lesser of capital cost and cost amount) rather than the fair market value, and the gain is deferred rather than removed.

The rollover also applies to a qualifying trust created by the deceased's will that is resident in Canada, where the spouse is entitled to receive all the trust's income for life and no one else may get income or capital during the spouse's lifetime. It 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. A spouse who was not resident in Canada immediately before death does not qualify, and the ordinary deemed disposition applies. The legal representative may also elect, property by property, that the rollover not apply.

Fair market value and keeping your records

The CRA defines fair market value as usually the highest dollar value you can get for property in an open and unrestricted market. It also tells owners to keep records of the fair market value of property on the date they inherit it.

The CRA's capital gains guidance does not spell out what evidence it expects to support the value used on a final return, beyond keeping records of the date-of-death value. For something hard to value, such as a cottage or private company shares, ask a lawyer or accountant what support makes sense in your case.

What to do before you sell

• Ask the executor for the fair market value used on the final return for each property you received.
• Keep any appraisal, statement or other record showing the value at the date of death.
• Find out whether the estate or a spouse rollover is involved before you assume your cost base.
• Keep receipts, but remember that maintenance and repairs are not added to the ACB.
• If the estate may sell the property, ask who will report the gain, since the estate reports it on the T3 return.
• Speak with an accountant or lawyer before signing a sale agreement.

Frequently asked questions