Is the Principal Residence Exemption Available After Death in Ontario?

When a homeowner dies, the family often assumes the house is tax-free because it was their home. That is frequently close to true, but the rules have steps that are easy to miss, and missing a form can cause trouble with the CRA. A second question is often asked too: what if the estate sells the house a few months later?

This article walks through how the principal residence exemption fits into the final return, what happens if the home goes to a spouse, and why a later sale by the estate needs separate attention. It is general information for Ontario families, not advice on your specific facts.

The deemed sale at death

For tax purposes, a person who dies is considered to have sold all of their property just before death. Capital property is deemed disposed of immediately before death at fair market value. The gain or loss is the proceeds minus the adjusted cost base, reported on Schedule 3 of the final return, with the taxable amount on line 12700.

This applies to a house even though nobody actually sold it. That is why the date-of-death value of the home matters. Many estates get an appraisal close to the date of death so there is a record of what the property was worth.

How the exemption applies to the deemed sale

The deceased's principal residence designation only applies until the date of death. So the exemption covers the gain up to that date, not the period after it. Even if the gain is fully exempt, the disposition must still be reported on Schedule 3, and the property must be designated on Form T1255.

In plain words, a fully exempt home means no tax on the gain, but not no paperwork. Leaving the home off the return can create problems later. Whether the exemption fully covers the gain depends on matters such as whether the property was the deceased's principal residence for all the years they owned it, and whether they owned other properties. An accountant can confirm this.

When the home goes to a spouse

Property transferred to a resident surviving spouse or common-law partner may be rolled over with no gain or loss on the final return, if it vests indefeasibly in the spouse or partner within 36 months of death. The legal representative may elect out of the automatic rollover.

Why would anyone elect out? Whether that makes sense depends on the numbers and the family's situation, so this is a decision to make with professional help before the final return is filed.

What if the estate sells the home later?

If the house is later sold for more than its value at death, the increase after death is a separate question. Because the designation only applies until the date of death, you should not assume that the exemption protects growth that happens afterwards.

How that later gain or loss is taxed, and in whose hands, depends on who owns the home at the time of sale, how long the estate holds it, and how the will directs it. These are points to confirm with an accountant or lawyer before the sale closes. A quick sale at or near the date-of-death value often leads to little or no later gain, which is another reason a date-of-death appraisal is useful.

Also remember that capital losses have limits. A capital loss cannot be claimed on personal-use property other than listed personal property. So if the home sells for less than its value at death, you should not assume the loss can be claimed.

What to do next

• Get a date-of-death appraisal or other evidence of the home's fair market value.
• Gather the purchase records, renovation receipts and any past designations to support the adjusted cost base.
• Confirm whether the deceased owned any other property that could be a principal residence.
• Decide with an accountant whether a spousal rollover should be used or the election out made.
• Report the disposition on Schedule 3 and designate the property on Form T1255, even if no tax is owing.
• Before listing the home, ask a lawyer or accountant how the sale will be taxed in the estate.

Funeral costs, probate fees and fees to administer the estate cannot be deducted as personal expenses on the deceased's returns. How those costs fit into the tax picture for the home depends on your situation, so it is worth confirming with an accountant or lawyer.

Frequently asked questions