Principal Residence Exemption When You Inherit a Home in Canada

You have inherited a house and now plan to sell it. The first question most heirs ask is whether the sale is tax-free because the home was the deceased's principal residence. The answer depends on two separate stories: what happened to the home at death, and what has happened to it since you took it over.

This article explains the general rules in plain language. Every estate is different, so the points below are a map for your conversation with the executor and an accountant or lawyer, not a substitute for it.

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

What happens to the home at death

A deceased person is considered to have sold all of their property just before death, and the principal residence designation applies only until the date of death. Even if the gain is fully exempt, the executor must designate the home on the final return using Schedule 3 and Form T1255.

If the home passes to a surviving spouse or common-law partner who is resident in Canada, or to a qualifying testamentary spousal trust, and it vests within 36 months of death, a rollover applies and no deemed disposition arises unless the legal representative elects out. That election is made on the final return, property by property.

When your ownership begins

For an heir, ownership is acquired on the date you obtain a right to possess the property for your enjoyment. Your years of ownership start from that date, and the deceased's years do not carry over to you, except under the spousal rollover rules.

A spouse, former spouse or qualifying spousal or alter ego trust that acquires the home by transfer is treated as having owned it for the period the transferor owned it, so the transferor's designated years can count.

Can you use the exemption on the sale?

You must meet the usual tests. The home must be a housing unit you own, alone or with others, and it must be ordinarily inhabited in the year by you or by a spouse, common-law partner, former spouse or partner, or child. If you are one of several co-owners, each of you reports your own share and designates separately, and a co-owner who does not live in the home cannot designate it unless that co-owner, or their spouse or partner, former spouse or partner, or child, ordinarily inhabited it in the year.

Only one property per family unit can be designated for each year from 1982 onward, so a home you already live in may compete with the inherited one. If you never lived in the inherited house and simply hold it for sale, how this applies depends on your situation, so it is worth confirming with a lawyer.

Selling quickly can raise another issue. A gain on a flipped property, meaning a Canadian housing unit owned for less than 365 consecutive days before sale, is deemed business income and the exemption does not apply. However, the rule does not apply to a sale that can reasonably be considered to occur due to, or in anticipation of, the death of the taxpayer or a related person.

Cost base and calculating the gain

Adjusted cost base is generally the property's cost plus acquisition expenses such as commissions and legal fees, plus capital expenditures such as additions and improvements. Maintenance and repairs cannot be added. For an inherited home, how your starting figure is worked out depends on your situation, including whether the home passed to a surviving spouse or common-law partner, so it is worth confirming with a lawyer.

The capital gain is proceeds of disposition minus the cost base and the selling costs, and half of the gain is taxable. If the home sells at a loss, you cannot claim it, because a home is personal-use property.

What to do next

• Ask the executor for the date of death, the value used on the final return and whether the spousal rollover or an election out was used.
• Record the date you obtained the right to possess the home.
• Keep receipts for improvements and selling costs.
• Report the sale on Schedule 3 of your T1 return, even if no tax is owing.
• Speak with an accountant or lawyer before listing the home if you have not lived in it.

Frequently asked questions