Joint Ownership and Capital Gains When One Owner Dies in Canada

If you owned a home, cottage or investment account with someone who has died, you may be asking two things: what tax applies to their share, and what your own cost base is now. Both answers come from how the Income Tax Act treats property at death, and the details depend on how the property was held and who you were to the deceased.

This article walks through the general federal rules for capital property at death and points out where joint ownership makes the facts matter. It cannot say how your particular property is divided, so use it to prepare questions for an accountant or lawyer.

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

The basic rule at death

A person who dies is deemed to have disposed of each capital property immediately before death for proceeds equal to its fair market value. The gain or loss is that value minus the adjusted cost base, and it is reported on Schedule 3 and line 12700 of the deceased's final return.

The 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 figure becomes the new owner's adjusted cost base. If you later sell, the CRA says you generally calculate your gain or loss as the sale price minus the value reported on the final return.

Where joint ownership changes the picture

The rules above apply to the property the deceased owned and that passes because of the death. When property is held jointly, the part that counts as the deceased's, and the part you already owned, depends on the way title was held and on the facts. That is not something a general article can settle, so ask a lawyer or accountant to confirm how your property is treated.

For the part of a property that you acquire because of the death, your cost is the fair market value immediately before death. How that fits together with the part you already owned depends on how the property was held, so it is worth confirming with an accountant or lawyer. Keeping the original purchase records and a date-of-death valuation lets your accountant work out the numbers.

If the surviving owner is the spouse or partner

A different rule can apply where property is transferred or distributed as a consequence of death to a spouse or common-law partner resident in Canada. The deemed disposition at fair market value does not apply, the deceased is deemed to dispose of it at its adjusted cost base (or, for depreciable property, the lesser of capital cost and cost amount), and the spouse is deemed to acquire it at that same amount. This defers the tax rather than removing it.

• The property must vest indefeasibly in the spouse or a qualifying spouse trust within 36 months of death, or a longer period the Minister allows on written application.
• The spouse must have been resident in Canada immediately before the death; a non-resident spouse does not qualify and the ordinary fair market value rule applies.
• The legal representative can elect in the final return that the rollover not apply, property by property, so that fair market value proceeds are used instead.

The election can be useful to use the deceased's losses, the capital gains deduction or lower rates on the final return.

Homes and cottages

A gain on the deceased's home may be fully or partly exempt, but the property must still be reported on Schedule 3 and designated on Form T1255, and the designation covers only years up to the date of death. The gain is fully exempt if the home was the principal residence for all years owned, or all but one, and no other property was designated for those years.

If a family owns a home and a cottage, only one can be designated for each year, so part of the gain on the other may be taxable on the final return. Any later sale of a property you now own is a separate event for you.

What to do next

• Gather the title documents showing how the property was held.
• Find the original purchase price and records of any major improvements, remembering that routine repairs and maintenance cannot be added to the cost base.
• Get a date-of-death valuation; the CRA says to keep records of fair market value.
• Confirm whether you were the deceased's spouse or common-law partner and resident in Canada.
• Ask whether the executor should elect out of the rollover for any property.
• Speak with an accountant or lawyer before selling, so the sale is reported correctly.

Frequently asked questions