Spousal Rollover of Capital Property at Death in Canada

When one spouse dies, the surviving spouse often wonders whether the home, investments or business can pass without a tax bill. In many cases the answer is yes, because of the spousal rollover, but it defers tax rather than cancelling it.

This article explains how the rollover works, the conditions it depends on, the cases where it does not apply, and why an executor might choose to opt out.

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

What the rollover does

Normally, a deceased taxpayer is deemed to have sold capital property at fair market value just before death, and the person who acquires it is treated as buying it at that value. The rollover changes that.

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 rules do not apply. The deceased is deemed to dispose of it for proceeds equal to the adjusted cost base (or, for depreciable property, the lesser of capital cost and cost amount), and the spouse is deemed to acquire it at that same amount.

Because proceeds equal cost, there is generally no gain on the final return for that property. The spouse takes over the same cost amount, so how a gain built into the property is taxed later depends on the spouse's own situation, and it is worth confirming with an accountant or lawyer.

Conditions that must be met

• The spouse or common-law partner must have been resident in Canada immediately before the taxpayer's death. A non-resident spouse does not qualify, and the ordinary deemed disposition applies.
• The property must vest indefeasibly in the spouse or trust within 36 months after death, or a longer period the Minister allows on written application.
• The transfer must happen as a consequence of death, for example through the will or on a distribution of the estate.

The rollover also applies to a trust created by the deceased's will that is resident in Canada, where the spouse is entitled to receive all the trust's income for life and no one else may get income or capital during the spouse's lifetime. Resource property and land inventory have a separate spouse and spouse-trust deemed-proceeds rule that also requires vesting within 36 months.

Opting out of the rollover

The rollover applies 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 the rollover not apply so that the regular deemed-disposition rule applies instead.

The CRA says the election is made property by property, and proceeds are then set at fair market value. This can be useful to use the deceased's losses, the capital gains deduction, or lower rates on the final return.

Opting out can trigger tax now in exchange for a higher cost base for the spouse. Whether that is worthwhile depends on the deceased's losses, available deductions and the spouse's own situation, so run the numbers with an accountant first.

Related rules for registered plans and other property

Registered plans follow their own rules. A refund of premiums from an RRSP paid to a qualifying survivor reduces the deceased's income and is taxed to the survivor unless transferred. The survivor can defer tax by transferring the refund to an RRSP, RRIF, PRPP, SPP or eligible annuity within the time allowed, and a transfer to an RRSP requires the survivor to be 71 or younger at the end of the year of transfer.

For a TFSA, a surviving spouse or common-law partner named successor holder becomes the holder immediately, and the deceased is not considered to have received an amount from the TFSA. Quebec does not recognize successor holder designations, but a survivor there can make an exempt contribution to their own TFSA by December 31 of the year after the year of death.

Farm or fishing property passing to a child has its own election, allowing a deemed proceeds amount within set limits.

What to do next

• Confirm that the spouse or common-law partner was resident in Canada at the date of death.
• List each capital property with its adjusted cost base and fair market value.
• Check the will and note any property that may not vest within 36 months.
• Ask an accountant whether opting out for any property would help on the final return.
• Remember the final return is generally due April 30 of the following year for a death from January 1 to October 31.
• Obtain a clearance certificate before distributing property.

If the 36-month period may be missed, a written application to the Minister is needed for a longer period. A lawyer can also review whether a spousal trust meets the conditions.

Frequently asked questions