- At death the deceased is deemed to have sold each capital property at fair market value, and the home is no exception.
- The representative must still designate the home as a principal residence on the final return using Form T1255, even when the whole gain is exempt.
- The designation on the final return covers only years up to the date of death.
- A gain on a later sale by the estate is reported on the estate's T3 return.
The deceased's home is often the largest asset in the estate, and the executor often needs to sell it. Then the question arises: will capital gains tax apply, and is the principal residence exemption still available?
The answer has two parts. One is what happens at the moment of death, which is reported on the final return. The other is what happens when the estate sells the home later, which is reported on the estate's T3 return. This article walks through both in general terms.
Two separate moments: death and the later sale
Immediately before death, the deceased is deemed to have sold each capital property at fair market value. That deemed sale is reported on the final return, even though no one has actually sold anything yet.
If the estate then sells the home, that is a second event. The gain is reported on line 1 of the estate's T3 return and is calculated on T3 Schedule 1. It is generally measured from the fair market value reported on the final return, and how disposition costs enter the calculation is worth confirming with an accountant.
| Event | Where reported | How the gain is generally measured |
|---|---|---|
| Deemed sale at death | Final return (T1) | Fair market value at death compared with the cost base |
| Actual sale by the estate | Estate T3 return | Sale price compared with the value reported on the final return, with disposition costs taken into account, on T3 Schedule 1 |
The exemption on the final return
The legal representative must still designate the home as a principal residence on the final return, using Form T1255 and Schedule 3, even when the whole gain is exempt. This is a step that is easy to forget when the home is the only significant asset.
The designation applies only to years up to the date of death. The basic formula for individuals under section 40(2)(b) of the Income Tax Act is the gain A, minus A multiplied by B/C, where B is the number of years designated (plus 1 if the person was resident in Canada in the year of acquisition) and C is the number of years owned.
If the deceased owned only one home and lived in it for all the years they owned it, the gain at death may be fully sheltered. If they owned a second property such as a cottage, the choice of which property to designate for which years requires careful calculation, and an accountant should do it.
Spouses and the rollover
If the home passes to a spouse or spousal trust under the rollover, the deemed disposition is not needed. Under section 70(6), property passing to a Canadian-resident spouse or common-law partner, or to a qualifying spousal trust, is deemed disposed of at adjusted cost base, and the property must vest indefeasibly within 36 months of death. The representative can elect out of that rule.
What happens to the gain after death
The estate's own period of ownership is a separate question. The designation made on the final return covers only years up to the date of death. Trusts and estates are dealt with under separate rules rather than the individual formula.
Whether and how an estate can claim the principal residence exemption for the time it owns the home depends on your situation. This should be confirmed with an accountant before you assume that any gain on the estate's sale is tax free.
- If the home is sold soon after death at about its value at death, the gain on the estate's sale may be small, because it is measured from the value reported on the final return.
- If the market rises or falls while the estate holds the home, the result on the estate's sale will differ from the value at death, and how it is treated depends on your situation.
- How a loss on the sale could be used depends on your situation, so it is worth confirming with an accountant.
What to do next
- Get a written valuation of the home as of the date of death, since fair market value drives both returns.
- Collect purchase records, renovation receipts and the dates the deceased lived there to support the cost base.
- Ask the accountant to complete Form T1255 and Schedule 3 for the final return.
- Keep sale documents, including legal and real estate costs, because disposition costs are part of the T3 calculation.
- Confirm with the accountant how the estate's own ownership period will be treated before listing the home.
- Do not distribute sale proceeds until you have considered a CRA clearance certificate.
Frequently asked questions
Does the principal residence exemption apply when the owner has died?
The representative designates the home on the final return using Form T1255 and Schedule 3, even if the whole gain is exempt. The designation covers only years up to the date of death.
Where is the gain reported when the estate sells the house?
On line 1 of the estate's T3 return, calculated on T3 Schedule 1. It is generally measured from the fair market value reported on the final return, and an accountant can confirm how disposition costs are treated.
What if the house goes to the surviving spouse?
If the home passes to a spouse or spousal trust under the rollover, the deemed disposition is not needed. The property is deemed disposed of at adjusted cost base and must vest indefeasibly within 36 months of death.
Can the estate claim the exemption for the time it owns the home?
That depends on the facts and on separate rules that apply to trusts rather than the individual formula. Confirm it with an accountant before you rely on it.
Sources
- Justice Laws – Income Tax Act s. 70 — Justice Laws (federal)
- CRA – Taxable capital gains (someone who died) — canada.ca
- Justice Laws – Income Tax Act s. 40 — Justice Laws (federal)
- CRA – Apply for a clearance certificate — canada.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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