- At death, a person is treated as having sold their capital property at fair market value, which can create a large capital gain on the final return.
- If the property passes to a surviving spouse or common-law partner who lives in Canada, or to a qualifying spousal trust, the gain is generally deferred through the rollover.
- The rollover has conditions, including a 36-month vesting deadline and strict trust rules, so check the details before the estate acts.
A cottage or rental property often carries years of growth in value. When the owner dies, families worry that a tax bill could force a sale, especially if the property was meant to stay with the surviving spouse.
This article explains in plain terms how the deemed sale at death works, how the spousal rollover can defer the gain, and what can go wrong. Tax outcomes depend on the facts, so an accountant or lawyer should confirm how this applies to your estate.
What happens to a cottage or rental property at death
For tax purposes, a person is deemed to have disposed of their capital property at fair market value immediately before death. A cottage or rental property is the kind of asset this usually covers. Nobody has to actually sell it. The tax law simply treats the property as sold, and any gain is reported on the deceased's final return.
If the property has grown a lot in value, that deemed sale can produce a large capital gain. The rollover is the main tool that can postpone it where the property goes to a spouse.
How the spousal rollover works
If capital property passes to a surviving spouse or common-law partner who is resident in Canada, or to a testamentary spousal trust, the deceased is deemed to sell it at adjusted cost base instead of fair market value. The capital gain on the final return is then zero, and the survivor takes over the deceased's cost.
The gain is not erased. It is deferred, because the survivor inherits the low original cost and will face the gain later. Common-law partners qualify for the rollover as well as married spouses.
| Where the property goes | General tax result at death |
|---|---|
| Directly to a Canadian-resident spouse or common-law partner | Deemed sale at adjusted cost base; no gain on the final return |
| To a qualifying testamentary spousal trust | Same rollover; gain deferred |
| To anyone else, or a trust that does not qualify | Deemed sale at fair market value |
Conditions and deadlines to watch
The property must be locked in, meaning it vests indefeasibly, for the spouse or the trust no later than 36 months after death. A written extension request can be made to the Tax Services Office before the 36 months end. Because the deadline can pass quietly during a slow estate, put it on a calendar early.
The legal representative can also choose not to use the rollover. An election in the final return, made property by property, transfers the property at fair market value instead. Some families consider this when the deceased has unused losses or other reasons to report the gain now, but whether it makes sense depends on the whole return.
Using a spousal trust for the cottage
Some families leave the cottage in trust so that it eventually passes to children. A qualifying spousal trust must be created by the deceased's will. The surviving spouse must be entitled to all the trust income arising before their death, and no one else may receive or use trust income or capital during the spouse's lifetime.
A trust that does not meet these conditions does not get the rollover, and the cure in s. 70(7) is available only where the problem is testamentary debts. When the beneficiary spouse later dies, the trust is deemed to dispose of its capital property at the end of that day, which is when the deferred gain is taxed.
- Drafting matters: a trust clause that lets a child use the cottage during the spouse's lifetime can defeat the rollover.
- Plan for the later tax bill, because the gain is taxed when the second spouse dies.
What to do next
If you are married and the deceased was your spouse, Ontario estate rules sit alongside the tax rules. A survivor can claim half the difference in net family property under the Family Law Act, take what the will gives, or, if there is no will, take their share under the Succession Law Reform Act. To claim equalization, the Election of Surviving Spouse form must be filed with the Estate Registrar for Ontario no later than six months from the death. The choice can change who receives the cottage, so it affects the tax picture too.
- Find the will and check whether the cottage goes to you outright or to a trust.
- Get a valuation and the original cost of the property.
- Note the 36-month vesting date and the six-month election date.
- Ask an accountant whether to use the rollover or elect out for each property.
- Have a lawyer review any spousal trust wording before the estate acts.
Frequently asked questions
Do I pay tax right away if my spouse leaves me the cottage?
Generally not on the deemed sale, if the cottage passes to you as a Canadian-resident spouse or common-law partner, or to a qualifying spousal trust. The gain is deferred, not removed, and you take over the deceased's cost.
Does the rollover apply to common-law partners?
Yes. The rollover covers a surviving spouse or common-law partner resident in Canada. Ontario property-division rules differ for common-law couples, so the estate side may still need advice.
What if the cottage goes to our children instead?
Then the rollover is not available, and the deceased is generally deemed to have sold it at fair market value immediately before death. Planning ahead with a lawyer and accountant can show other options.
Can the estate choose not to use the rollover?
Yes. The legal representative can elect in the final return, property by property, to transfer at fair market value instead. An accountant can model whether that helps.
Sources
- Ontario.ca – Dividing property when a marriage or common law relationship ends — ontario.ca
- Ontario.ca – Administering estates — ontario.ca
- Income Tax Act, s. 70(5) — Justice Laws (federal)
- CRA – Capital property other than depreciable property (deceased) — canada.ca
- CRA Income Tax Folio S6-F4-C1, Testamentary Spouse or Common-law Partner Trusts — canada.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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