Spousal Rollover at Death in Canada: How the Tax Deferral Works

When someone dies owning a home, investments, a cottage or shares in a business, the tax system usually treats the death as if everything had been sold. That can leave a large tax bill on the final return, even though nothing was actually sold and no money changed hands.

Property left to a spouse or common-law partner is often treated differently. This article explains how the rollover works, who qualifies, the time limit that catches people out, and the election that lets an estate choose not to use it.

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

The usual rule, and what the rollover changes

On death, a taxpayer is deemed to have disposed of each capital property immediately before death for proceeds equal to its fair market value, and the tax is carried by the final return rather than by any inheritance tax. The person who receives the property because of the death is deemed to acquire it at a cost equal to its fair market value at that time.

The spouse or common-law partner rollover in section 70(6) of the Income Tax Act changes that result. Where property of a taxpayer resident in Canada immediately before death is transferred or distributed as a consequence of death to a spouse or common-law partner resident in Canada, the usual fair market value rules do not apply. Instead, the deceased is deemed to dispose of the property for proceeds equal to its adjusted cost base. For depreciable property, the amount is the lesser of capital cost and cost amount.

Because the proceeds equal the cost, there is no gain on the final return from that property. The tax is not erased. It is put off, because the spouse takes over the same cost figure.

Who and what qualifies

The rollover has conditions, and missing one means the ordinary rule applies. In plain terms, these are the main ones:

• The deceased was resident in Canada immediately before death.
• The spouse or common-law partner was also resident in Canada immediately before the death. A non-resident spouse does not qualify, and the ordinary deemed disposition at fair market value applies.
• The property went to the spouse directly, or to a qualifying spouse trust.
• The property vests indefeasibly in the spouse or trust within 36 months after death, or within a longer period the Minister allows.

A qualifying spouse trust is a trust created by the deceased's will that is resident in Canada. The spouse must be entitled to receive all of the trust's income for life, and no one else may get any of the income or capital while the spouse is alive. A trust that lets someone else receive capital during the spouse's lifetime does not fit this description, so the wording of the will matters a great deal.

The 36-month vesting requirement

The rollover applies only if the property vests indefeasibly in the spouse or the trust within 36 months after death, or a longer period the Minister allows on written application.

Estates that are contested, that hold hard-to-sell assets, or that have unclear will wording can run up against this limit. If it looks likely that distribution will take longer, ask a lawyer early about whether a written application for more time makes sense. Whether an extension is available depends on the facts.

Opting out: the section 70(6.2) election

The rollover happens automatically when its conditions are met, but it is not always the best result. The legal representative may elect, in the final return for the year of death, that section 70(6) not apply, so that the regular deemed disposition rule in section 70(5) applies instead. The CRA says the election is made property by property, and proceeds are then set at fair market value.

Why would an estate choose to pay tax now? The election can be useful to use the deceased's losses, to claim the capital gains deduction, or to take advantage of lower rates on the final return. The lifetime capital gains deduction can apply to gains on qualified small business corporation shares or qualified farm or fishing property, and is claimed on line 25400 using Form T657.

If the election is made, the spouse takes the property at its fair market value at the time of death instead of the deceased's adjusted cost base, and that figure becomes the spouse's cost. Whether this trade-off helps depends on the numbers, the deceased's other income and the spouse's own tax position, so it is worth running the figures with an accountant before the final return is filed.

The spouse's cost base and special cases

Under the rollover, the spouse is deemed to acquire the property at the same amount as the deceased's deemed proceeds.

Resource property and land inventory follow a separate rule. They are deemed disposed of at fair market value under section 70(5.2) on death, and there is a separate deemed-proceeds rule for a spouse or spouse trust that also requires vesting within 36 months. Farm and fishing property passing to a child has its own choice of deemed proceeds, covered under a different set of rules.

What to do next

If a spouse or common-law partner is inheriting, a few early steps can prevent expensive surprises.

• Confirm where both the deceased and the spouse were resident immediately before the death.
• List each capital property, with its adjusted cost base and an estimate of its fair market value.
• Read the will to see whether property goes to the spouse outright or into a trust, and whether the trust terms match the qualifying spouse trust description.
• Note the date 36 months after death and plan distribution or vesting before it.
• Ask your accountant to compare the rollover with the election, property by property, before the final return is filed.
• Keep records of fair market value at the date of death, as the CRA tells owners to do.

Because the election is made in the final return for the year of death, decide early rather than after filing. A lawyer or accountant can confirm how these rules apply to your situation.

Frequently asked questions