What Happens to a Home's Exemption When the Owner Dies in Canada?

If you are the executor of someone who owned a home, one of your first tax questions is whether the home creates tax on the final return. Often it does not, but the exemption is not automatic. It has to be claimed properly.

This article walks through the deemed disposition at death, the designation steps, the spousal rollover, and what changes for the person who inherits the home.

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

The deemed disposition at death

A deceased person is considered to have sold all of their property just before death. For a home, the principal residence designation applies only until the date of death.

The capital gain is the proceeds minus the adjusted cost base and the outlays and expenses of the sale. Half of the capital gain is taxable. If the home qualifies and is designated for every year, or every year but one, the gain can be fully exempt.

Designating the home on the final return

Even if the gain is fully exempt, the executor must designate the home on the final return using Schedule 3 and Form T1255. Since the 2016 tax year, a sale or deemed sale of a principal residence must be reported on Schedule 3 of the T1 return, even if there is no gain. CRA allows the exemption only if the disposition and designation are reported.

On Schedule 3, the designation is made in Part 1 at line 17900. Box 1 is ticked if the home was the principal residence for all years owned or all but one, and box 3 if it was not the residence for every year owned. Form T2091(IND) is used to designate and calculate any gain.

• Confirm which years the deceased owned the home and who lived in it.
• Check whether another property could be designated for the same family unit in any year, since only one is allowed.
• Calculate the adjusted cost base, which is generally cost plus acquisition expenses and capital improvements, but not repairs.
• Complete Schedule 3, Form T2091(IND) and Form T1255.

When the home goes to a spouse or partner

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, the rollover applies and no deemed disposition arises. The legal representative can elect out, in which case proceeds equal fair market value immediately before death. The election is made on the final return, property by property.

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.

What it means for the heir

For other heirs, ownership is acquired on the date the person obtains a right to possess the property for their enjoyment, and their years of ownership start from that date. The deceased's years do not carry over except under the spousal rollover rules.

If the heir later sells, the home generally qualifies only for the years it was their own principal residence, so an heir who never lived there may face tax on later growth. A home sold shortly after being acquired may also raise the flipping rule, although there are exceptions for dispositions that occur due to the death of a taxpayer or a related person.

What to do next

• Gather the purchase documents, records of improvements and the sale or valuation details.
• Check whether the rollover conditions are met, and if so, the legal representative decides whether to elect out on the final return, property by property.
• Prepare Schedule 3 and the related forms for the final return.
• If the designation was missed, ask CRA to amend the return, since late designation may be accepted but a penalty may apply.
• Speak with a lawyer or accountant before filing, especially if the home was ever rented or partly used for business.

Frequently asked questions