Spousal Rollover on Death: Passing Capital Property Tax-Free in Canada

When someone dies, the tax system normally treats their capital property as if it had been sold just before death. If you are the surviving spouse or common-law partner, you may worry that inheriting the house, investments or business shares will trigger a large tax bill.

There is a rule that often prevents that, called the spousal rollover. It has conditions, it can be switched off, and it does not cover every kind of property in the same way. This article explains the main points so you know what to ask.

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

The normal rule the rollover replaces

On death, a person is deemed to have disposed of each capital property immediately before death for proceeds equal to its fair market value, and the resulting tax is carried on the final return, not by an inheritance tax. The person who acquires the property because of the death is deemed to acquire it at fair market value at the time of death, which sets their adjusted cost base.

The gain is reported by the deceased on the final return, not by the beneficiaries. The rollover changes the numbers used in this calculation when the property goes to a spouse.

How the spousal rollover works

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. The deceased is deemed to dispose of the property for proceeds equal to its 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.

In plain terms, the tax is deferred, not erased. Because the spouse takes over the original cost, the gain that built up is still there and can be taxed when the spouse later sells the property or dies.

Conditions and exceptions

• The spouse or common-law partner must have been resident in Canada immediately before the 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.
• A trust created by the deceased's will can also qualify if it is resident in Canada, the spouse is entitled to all of 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 their own deemed-proceeds rule for spouses and spouse trusts, which also requires vesting within 36 months.

Farm or fishing property passing to a child has a separate choice of deemed proceeds within set limits, where child includes grandchildren, great-grandchildren and certain dependants.

Opting out of the rollover

The legal representative may elect, in the final return for the year of death, that the rollover not apply so 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.

People do this to use the deceased's losses, the capital gains deduction, or lower rates on the final return. Whether it helps depends on the facts, so it is worth running the numbers with an accountant before filing.

What to do next

• List each capital property and note who is receiving it and when it will be transferred.
• Confirm that the spouse or common-law partner was resident in Canada at death.
• Diarize the 36-month vesting deadline and ask a lawyer early if an extension may be needed.
• Ask the legal representative and an accountant whether to elect out for any property.
• Keep records of the fair market value of each property at the date of death.

Wills with spouse trusts and estates with mixed property are where mistakes happen, so a lawyer or accountant should review the plan before property is distributed.

Frequently asked questions