Spousal Rollover at Death in Ontario: Deferring Tax on Assets

When your spouse or common-law partner dies, you may wonder whether you will owe tax on what you inherit. The answer depends on the type of asset, how it passes to you, and whether the legal representative uses the rollover or chooses not to.

This article explains the general rule on death, then the spousal rollover and its exceptions for property, the family home, RRSPs, RRIFs, home plan balances and TFSAs. It is general information, and an accountant or lawyer can confirm how it applies to your situation.

The general rule: a deemed sale at death

For tax purposes, a person is treated as having sold each capital property immediately before death. The deemed sale price is the property's fair market value at that time, and the person who acquires the property generally takes that value as their cost.

This applies even if nothing was actually sold. Capital property includes real estate such as homes and cottages, investments such as stocks, mutual funds and crypto-assets, and personal belongings such as art, collections and jewellery. Only the taxable portion of a capital gain is included in income, and the inclusion rate is one-half.

How the spousal rollover changes the result

Property of a deceased person who was resident in Canada that passes to a spouse, a common-law partner or a qualifying spousal trust rolls over at the deceased's adjusted cost base instead of fair market value. That means no gain is triggered at death on that property.

The property must vest indefeasibly in the recipient within 36 months after the death, and the Minister can extend that period. In plain words, the survivor or trust must become the secure owner, not just a possible owner.

The legal representative can also elect not to use the rollover. The election is made one property at a time on the return for the year of death, and the deemed sale at fair market value then applies to that property. This can be used to realize gains or losses on the final return.

• Rollover: tax on the gain is deferred until the survivor later sells or dies.
• Election out: the gain or loss is reported on the final return for that property.

The family home and other special property

If the home passes to a surviving spouse or common-law partner, no principal residence designation for the period before death, and no deemed sale or gain, has to be reported on the final return. The legal representative should still keep records of the years the deceased could have designated.

Other rules apply to other cases. For example, CRA recognizes a separate exception for qualified farm or fishing property transferred to a child. Rental or business buildings can trigger recapture of capital cost allowance or a terminal loss, reported on Form T776 or Form T2125. Ask an accountant how these apply to your situation.

RRSPs, RRIFs and home plan balances

For an unmatured RRSP, the deceased is treated as having received the fair market value of all property in the plan immediately before death, and that amount is included in income on the final return. The survivor rules reduce that result.

• Direct transfer: if all the RRSP property goes directly to the survivor's RRSP, RRIF, PRPP, SPP or an eligible annuity before the end of the year after the death, no T4RSP is issued in the deceased's name. The survivor reports the payment and claims an offsetting deduction.
• Estate named as beneficiary: if the survivor is entitled under the will, the survivor and the legal representative can jointly elect in writing to treat the estate's payments as paid to the survivor. The election is attached to the survivor's return.
• RRIF successor annuitant: a surviving spouse or common-law partner can continue as the new annuitant, by written election or with the legal representative's consent and the carrier's agreement. The full RRIF value is then not taxed on the final return.
• Unpaid Home Buyers' Plan or Lifelong Learning Plan balances: these are included on line 12900 of the final return, unless the legal representative and the survivor jointly elect to have the survivor continue the repayments.

TFSAs: successor holder or beneficiary

A surviving spouse or common-law partner named as successor holder in the TFSA contract or will takes ownership of the account at death. Growth after death stays sheltered, and the deceased is not considered to have received any amount. The survivor's own contribution room is not affected, as long as the deceased's TFSA had no excess amount.

A spouse named only as beneficiary, rather than successor holder, is treated like other beneficiaries. The deceased is considered to have received the account's fair market value immediately before death, though no TFSA income is reported on the final return, and earnings after death are taxable to beneficiaries in the year they receive them. Check how the account is actually designated before you assume either result.

What to do next

• List every asset, noting who is named as beneficiary or successor and the date-of-death values.
• Decide with an accountant, property by property, whether to use the rollover or elect out.
• Confirm RRSP and RRIF transfers happen before the end of the year after the death.
• Keep records of the years the home could have been designated.
• File the final T1 return, which reports income and property gains up to the date of death.

The survivor's own return is due on the later of their normal due date and 6 months after the death, but any balance owing must still be paid by April 30 to avoid interest. A lawyer or accountant can help with elections and with the clearance certificate before the estate is distributed.

Frequently asked questions