How Does a Spousal Rollover Work on a Final Return in Canada?

When someone dies, the tax rules treat their property as if it had been sold. That can create a large tax bill on the final return, even though nothing was actually sold and the family may simply be keeping the assets.

If you are the surviving spouse or common-law partner, or the executor dealing with the estate, a spousal rollover can defer that tax. This article explains how the rollover works, what conditions apply, and where RRSPs and RRIFs fit in.

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

Why a rollover matters

On death, each capital property is treated as sold immediately before death at fair market value. The resulting taxable capital gain or loss is calculated on Schedule 3 and reported on line 12700 of the final return, even if the property is never sold.

A spousal rollover is the main exception. Property passing to a surviving spouse or common-law partner who was a Canadian resident can roll over without a gain or loss, if it vests in them within 36 months of death.

The conditions for a capital property rollover

• The person receiving the property must be the deceased's surviving spouse or common-law partner, and must have been a Canadian resident.
• The property must vest in the survivor within 36 months of death.
• If more time is needed, an extension may be requested before the 36 months end.
• The legal representative can elect out of the rollover, and can do so property by property.

Whether property has actually vested in the survivor can depend on the will, the type of ownership and the law of the province or territory. That is a good question for a lawyer handling the estate.

Choosing to elect out

Because the legal representative can elect out of the rollover on a property-by-property basis, the rollover is not always an all-or-nothing choice. Some people elect out for a particular property on purpose, for example to use losses that would otherwise go unused.

Net capital losses of the final year and the prior year can offset other income. Whether electing out makes sense depends on the whole picture of gains, losses and other income, so it is worth running the numbers with an accountant before filing.

The principal residence exemption also interacts with the rollover. A principal residence gain may be exempt only if it is designated on Schedule 3 and Form T1255 in the final return, but this is not needed if the property is rolled to a spouse.

RRSPs and RRIFs follow their own rules

Registered plans are handled separately from capital property. For an unmatured RRSP, the deceased is treated as receiving the fair market value of all plan property just before death, and the T4RSP amount goes on line 12900 of the final return.

There is a spousal exception. If all plan property is transferred directly to the survivor's RRSP, RRIF, PRPP, SPP or an eligible annuity before the end of the year after death, no T4RSP is issued in the deceased's name. The survivor reports the payment and claims an offsetting deduction.

For a RRIF, the fair market value is included in the deceased's income unless the spousal conditions are met. A spouse or common-law partner named as successor annuitant in the contract or will becomes the annuitant and keeps getting payments. Without a written election, they can still become the annuitant if the legal representative consents and the carrier agrees.

After death, the legal representative can contribute to the surviving spouse's RRSP in the year of death or within 60 days after year-end. The survivor and legal representative can also jointly elect to treat amounts from a matured RRSP paid to the estate as paid to the survivor.

What to do next

• Confirm who the legal representative is. This is usually the executor named in the will, or the liquidator in Québec.
• Notify the CRA of the death and tell it you are acting for the estate.
• List every capital property and registered plan, with its fair market value at death and who is to receive it.
• Check whether each property will vest in the survivor within the 36-month window, and ask about an extension early if not.
• Decide, property by property, whether to keep the rollover or elect out.
• Before distributing property, obtain a clearance certificate, because distributing without one can make the legal representative personally liable.

A clearance certificate is requested only after all returns are filed and assessed and amounts owing are paid or secured. Because rollover choices affect the final return, an accountant or lawyer can help you confirm them before you file.

Frequently asked questions