Principal Residence Exemption on a Deceased Person's Home in Ontario

If you are the estate trustee and the main asset is the family home, one of your first questions is likely whether selling it will trigger tax. The answer depends on two separate periods: the time up to the date of death, and the time the estate holds the home afterwards.

This article explains how the principal residence exemption fits into the final return, what changes when the home goes to a surviving spouse, and why the estate's own gain after death is treated differently. Your accountant or lawyer can confirm how it applies to the particular property.

Is the sale of a deceased person's home tax-free?

Often the gain up to the date of death can be sheltered, but it is not automatic. CRA treats a deceased person as having sold all their property just before death, even if nothing was actually sold, and capital property includes real estate such as homes and cottages.

The deemed sale is made at the property's fair market value at that time, and the person who acquires the property generally takes that value as their cost. Only the taxable portion of a capital gain is included in income, and the inclusion rate is one-half.

The principal residence exemption is what can reduce or remove that gain on the home. It has to be claimed properly on the final return.

Designating the home on the final return

The home must still be designated as a principal residence on the final return, even if the designation exempts the whole gain. The legal representative does this by completing Schedule 3 and Form T1255, Designation of a Property as a Principal Residence by the Legal Representative of a Deceased Individual.

The exemption is calculated with the formula A × (B ÷ C). In that formula, B is 1 plus the number of tax years ending after acquisition in which the property was designated as the principal residence while the owner was resident in Canada. C is the number of tax years ending after acquisition in which the owner held the property.

In plain terms, how much of the gain is exempt depends on the years the home was designated compared with the years it was owned. If the deceased owned a cottage or another property that could also qualify, ask an accountant how to approach the designation.

When the home passes to a spouse or common-law partner

Different rules apply when the home is left to a survivor. The table sets out the main cases.

If the home goes to a survivor, the legal representative should keep records of the years the deceased could have designated.

When the estate holds and sells the home

If the estate sells the home after death, the capital gain is reported on line 1 of a T3 Trust Income Tax and Information Return. The gain is generally the sale price minus the fair market value reported on the final return, plus any disposition costs. Growth after death is therefore the estate's gain, not the deceased's.

The estate can claim the exemption itself only in limited cases. For tax years after 2016, a personal trust can designate a principal residence only if it is one of four types:

• an alter ego, spousal or common-law partner, joint spousal or similar settlor-lifetime trust
• a qualified disability trust
• a trust for a minor child of a deceased parent
• a trust for a qualifying individual eligible for the disability tax credit

A beneficiary, or that beneficiary's spouse, former spouse or child, must also have ordinarily inhabited the home. Unless the estate fits one of those types, do not assume the exemption carries on while the estate holds the home. Selling sooner may limit the estate's own gain, but whether your estate qualifies is worth confirming before you decide.

What to do next

• Get the date-of-death value of the home, since the final return and any later sale both depend on it.
• Gather records showing when the home was bought and which years it was the deceased's main residence.
• Find out who is inheriting the home, because a spouse or common-law partner changes the rules.
• Ask an accountant whether to complete Schedule 3 and Form T1255 for the final return.
• Have the estate keep sale records so any gain can be reported on the T3 return.

Frequently asked questions