- When a life estate ends on the life tenant's death, the holder is deemed to have disposed of it immediately before death for proceeds equal to its adjusted cost base.
- If an owner gives away the remainder interest and keeps a life estate, the owner is deemed to have disposed of the life estate at fair market value at that time.
- Who pays upkeep and other costs between a life tenant and a remainder owner turns on the wording of the will or deed, so read that wording first.
A life estate lets one person use a home for the rest of their life, while someone else is set to own it afterward. You might be the person with the life interest, or you might be the remainder beneficiary waiting for the property. Either way, the questions are usually the same: who pays for what now, and what happens when the life tenant dies?
The honest answer is that much of this depends on the wording of the will, deed or trust that created the life estate. This article explains the tax rules that apply in general, flags where the wording matters, and sets out what to gather before you speak to a lawyer or accountant.
What a life estate means in plain words
The life tenant has the right to live in or use the property for their lifetime. The remainder holder (sometimes called the remainderman) owns the future interest and takes full ownership once the life tenant dies. The two interests are separate, and each can have its own tax treatment.
A life estate can be created by a will, by a deed, or through a trust. Because the creating document sets out the rights, two families with a life estate can have very different results. Rules about repairs, insurance, selling and moving out are often written into that document, and that is the first place to look.
Who pays the costs while the life tenant is alive
There is no single rule that settles every cost between a life tenant and a remainder owner. Property tax, insurance, repairs and major capital items are often addressed in the document itself. If the document is silent, the answer can depend on the facts and on court-made rules, so a lawyer should confirm how it applies to your situation.
Mortgages are one area with a statutory starting point. Unless the deceased showed a contrary intention, a beneficiary of mortgaged property takes it primarily liable for the mortgage debt, and a general direction in a will to pay debts does not displace that rule. How that rule fits a property split between a life tenant and a remainder holder depends on the wording, so ask before assuming either person carries the mortgage.
- Read the will, deed or trust clause that creates the life estate.
- Look for any wording about taxes, insurance, repairs and mortgage payments.
- Check whether there is a mortgage and who the lender is dealing with.
- Keep receipts for any major repair, in case the cost is later disputed.
Tax rules when a life estate is created or ends
Two federal tax rules matter most. If an owner gives away the remainder interest in real property while keeping a life estate, the owner is deemed to have disposed of the life estate at fair market value at that time. When a life estate in real property ends on the life tenant's death, the holder is deemed to have disposed of it immediately before death for proceeds equal to its adjusted cost base.
Where the remainder holder and the life tenant were not at arm's length, the remainder holder's cost base can be increased. That can matter later if the remainder holder sells. An accountant can work out the actual numbers.
| Event | Deemed tax result | Source |
|---|---|---|
| Owner gives away remainder, keeps life estate | Life estate deemed disposed of at fair market value at that time | Income Tax Act s. 43.1(1) |
| Life tenant dies, life estate ends | Deemed disposed of immediately before death at adjusted cost base | Income Tax Act s. 43.1(2) |
| Owner dies owning the house outright | Deemed disposed of each capital property immediately before death at fair market value, although some or all of the gain on a principal residence may be exempt | Income Tax Act s. 70(5) |
Even where the whole gain on a principal residence is exempt, the legal representative must still designate the property on the final return by completing Schedule 3 and Form T1255.
A separate rule covers property left to a spouse or common-law partner. Property left to a spouse or common-law partner resident in Canada, or to a qualifying spousal trust, rolls over at cost, so no capital gain or loss arises on the final return, and the property must vest in the spouse or trust within 36 months after death. The legal representative may elect out of this rollover. How a life interest left to a spouse or common-law partner by will is treated depends on the wording and the facts, so it is worth confirming with an accountant or lawyer.
What happens when the life tenant dies
The life estate ends at death, and the remainder holder's right to the property takes effect. For tax purposes, the holder of the life estate is deemed to have disposed of it immediately before death for proceeds equal to its adjusted cost base. Who prepares the final return and how these figures are reported depends on your situation, so it is worth confirming with an accountant or lawyer.
The practical steps, such as how the life estate is cleared from title and how the remainder holder confirms ownership, depend on how the interest was created and how the property is registered. Ask a lawyer to confirm the steps and the documents needed for your property rather than relying on a general checklist.
If you are a remainder holder, which documents you will need depends on how the life estate was created and how the property is registered, so a lawyer can confirm the list for your property. If you are the life tenant's family, expect to coordinate the handover of keys, utilities and contents.
What to do next
- Find the will, deed or trust that created the life estate.
- Note who pays property tax, insurance and the mortgage today.
- Ask an accountant how the deemed disposition rules apply to the final return.
- Talk to a lawyer before anyone moves out, sells or changes the arrangement.
- Keep all communication between the life tenant and remainder holder in writing.
A short conversation with a lawyer early can prevent family disputes later, especially where the wording of the document is unclear.
Frequently asked questions
Does a life estate avoid tax when the life tenant dies?
Not automatically. When a life estate in real property ends on the life tenant's death, the holder is deemed to have disposed of it immediately before death for proceeds equal to its adjusted cost base. The actual result depends on the figures, so an accountant should confirm.
Can the remainder holder's cost base go up?
Where the remainder holder and the life tenant were not at arm's length, the remainder holder's cost base can be increased. How much depends on the facts.
Who pays the mortgage on a house with a life estate?
Unless the deceased showed a contrary intention, a beneficiary of mortgaged property takes it primarily liable for the mortgage debt. How that applies between a life tenant and a remainder holder depends on the wording of the document, so it is worth confirming with a lawyer.
What if the owner kept a life estate after giving the house away?
The owner is deemed to have disposed of the life estate at fair market value at the time the remainder interest was given away. Get tax advice before making that kind of arrangement.
Sources
- Succession Law Reform Act, R.S.O. 1990, c. S.26, s. 32 — Ontario e-Laws
- CRA – Taxable capital gains on property, investments, and belongings (deceased) — canada.ca
- Income Tax Act, s. 43.1 — Justice Laws (federal)
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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