Selling Inherited Property in Canada: What Is Your Cost Base?

You have inherited a house, a cottage, or some shares, and now you are thinking about selling. The first question is usually the same: how much of the sale price will be treated as a gain, and what counts as your cost? The answer starts with what happened on the day the person died, not with what they originally paid.

This article explains how the federal tax rules set your cost base on inherited property, how the gain is worked out, and why it matters whether the estate sells or you sell after the property has been transferred to you. It is general information, and the details of your situation are worth confirming with a lawyer or accountant.

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

What happens to the property at death

For tax purposes, a person who dies is treated as having disposed of each capital property immediately before death, for proceeds equal to its fair market value. The tax on any resulting gain is carried by the final return, not by an inheritance tax. The CRA describes this as the deceased being treated as having sold all property just before death, which can create a gain or a loss.

That gain is the fair market value on the date of death minus the adjusted cost base (ACB). It is reported on Schedule 3 and line 12700 of the final return, and it is reported by the deceased on that return, not by the beneficiaries.

Your cost base as the heir

The person who acquires the property because of the death is treated as acquiring it at the time of death, at a cost equal to its fair market value immediately before death. That figure becomes the heir's adjusted cost base.

So when you later sell, the CRA says you generally calculate your gain or loss as the sale price minus the fair market value that was reported on the final return. If the property has not gone up in value since death, there may be little or no gain to report. If it has, the increase after death is what you are taxed on.

Current expenses such as maintenance and repairs cannot be added to the ACB. Keep that in mind when you estimate your gain on a property you have been looking after.

Estate sells versus beneficiary sells

Who sells matters for where the gain is reported. Gains on property the estate sells after death are reported on the estate's T3 Trust Income Tax and Information Return, with capital gains on T3 line 1, using T3 Schedule 1. They are not reported on the final return.

If the property is first transferred to you and you then sell it, you work out your own gain using the cost base described above. The T3 return is due 90 days after the trust's year-end. Because the answer can turn on timing and on who held title when the sale closed, ask the estate's legal representative or an accountant which return is involved before you sign a sale agreement.

Fair market value and keeping records

The CRA defines fair market value as usually the highest dollar value you can get for property in an open and unrestricted market. It also tells owners to keep records of the fair market value of property on the date they inherit it.

The CRA's guidance does not set out exactly what evidence proves the value on a final return, beyond keeping those date-of-death records. For a home, a business, or unlisted shares, how best to support the number is a question for the legal representative, an accountant or a lawyer.

• Ask the legal representative what value was reported on the final return for each property.
• Keep whatever valuation records were prepared around the date of death.
• Keep the closing documents for any sale.
• Keep a note of improvements and repairs separately, remembering that current repairs do not raise your cost.

When the cost is different: spouse rollover

Not every inheritance resets to fair market value. When property of a taxpayer resident in Canada is transferred as a consequence of death to a spouse or common-law partner resident in Canada, the deemed disposition rule does not apply. The deceased is treated as disposing of it for proceeds equal to its ACB (or, for depreciable property, the lesser of its capital cost and cost amount), and the spouse is treated as acquiring it at that same amount. The same rollover can apply to a qualifying trust created by the will for the spouse.

It applies only if the property vests indefeasibly in the spouse or trust within 36 months after death, or a longer period the Minister allows on written application. A spouse who was not resident in Canada immediately before the death does not qualify, and the ordinary deemed disposition applies. The legal representative can also elect that the rollover not apply, property by property, in which case proceeds are set at fair market value. Other special rules exist, such as for farm or fishing property passing to a child.

What to do next

• Find out whether the property passed to a spouse or common-law partner, to the estate, or to you directly.
• Get the fair market value reported on the final return, and the date it was measured.
• Check whether the estate or you will be the seller, since that decides which return reports the gain.
• Before selling, speak with an accountant or lawyer about your expected gain and any exemption that may apply, such as a principal residence designation on the final return.

Frequently asked questions