Spousal Rollover on Death: How the Tax Deferral Works in Ontario

When someone dies, the tax return for the year of death can include large capital gains. For married and common-law couples, the federal spousal rollover can push that tax off to a later date.

If you are a surviving spouse or an executor, this article explains what generally transfers without tax, the conditions that apply, and when tax finally comes due. Because the outcome depends on the assets and the will, confirm the details with an accountant or lawyer.

The default rule: a deemed sale at death

Under the Income Tax Act, a person is deemed to have disposed of capital property at fair market value immediately before death. This means unrealized gains on things like investments or a cottage can be taxed on the final return even though nothing was actually sold.

The spousal rollover is the main exception to that default.

How the 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 at adjusted cost base. The capital gain on the final return is then zero, and the survivor takes over the deceased's cost.

Common-law partners qualify for the federal rollover as well as married spouses. Property law is different. In Ontario, common-law couples are not legally required to split property acquired while living together, but the tax rollover still applies to them.

• The property must be locked in, or vest indefeasibly, for the spouse or 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.
• A spousal trust must be created by the will, and the spouse must be entitled to all the trust income arising before their death, with no one else able to receive or use income or capital during the spouse's lifetime.
• A trust that does not meet the conditions does not get the rollover, and the cure under s. 70(7) is available only where the problem is testamentary debts.

Choosing not to use the rollover

The legal representative can elect in the final return, property by property, to transfer at fair market value instead of using the rollover. Executors sometimes consider this where it makes sense to report a gain now, for example to use up tax room on the final return. Whether that helps depends on the numbers, so an accountant should model it before the return is filed.

When tax finally applies

The rollover is a deferral. The survivor takes over the deceased's cost, so a gain built up over both lifetimes is still there. It generally comes into play in these situations:

On a separation rather than a death, a similar rollover idea applies. Capital property transferred to a spouse or common-law partner, or to a former spouse or partner in settlement of rights arising from the relationship, rolls over at adjusted cost base if both are resident in Canada, and the transferor may elect out in their return.

Registered plans have their own rules

RRSPs and RRIFs follow their own set of tax rules, which are described here separately from the rollover for other property. By default, an unmatured RRSP is treated as received at fair market value on the final return. If the spouse or common-law partner is the sole beneficiary and all the RRSP property is transferred to a plan for the spouse by December 31 of the year after death, the deceased is not taxed on the RRSP value. A RRIF with a successor annuitant who is the spouse also avoids tax for the deceased. Our separate article on RRSP rollovers covers the steps.

What to do next

• Gather the will, account statements and a list of who is named as beneficiary on each registered plan.
• Note the date of death and mark the 36-month point on a calendar.
• Ask the accountant preparing the final return whether to use the rollover or elect out for each property.
• If a spousal trust is in the will, ask a lawyer to confirm it meets the conditions.
• Keep records of the deceased's original cost, since the survivor takes it over.

Frequently asked questions