- An heir is generally treated as acquiring inherited property at its fair market value immediately before death, and that sets the adjusted cost base.
- A later sale produces a gain or loss measured from the value reported on the final return.
- Spouses, farm and fishing property, and non-resident spouses follow different rules.
If you have inherited property, such as shares, a rental property or a cottage, you may not owe tax when it passes to you. The question that comes later is what your cost is for tax purposes, because that number decides your gain when you sell.
This article explains how that cost is set, how it ties to the date-of-death value, and the exceptions that change the result. For a particular asset, a lawyer or accountant can confirm the figures.
This article covers Canadian federal tax law, which applies in every province.
How the heir's cost is set
On death, the deceased is deemed to have disposed of each capital property immediately before death for proceeds equal to its fair market value. The person who acquires the property because of the death is deemed to acquire it at the time of death at a cost equal to that fair market value, which sets the heir's adjusted cost base.
The tax on the deemed sale is reported by the deceased on the final return, not by the beneficiaries. So in the usual case you receive the property without paying tax on the gain, and you start with a cost base that reflects its value at death.
Calculating your gain or loss on a later sale
A beneficiary who later sells inherited property generally calculates the gain or loss as the sale price minus the fair market value reported on the final return. Current expenses such as maintenance and repairs cannot be added to the adjusted cost base.
Fair market value is usually the highest dollar value you can get for property in an open and unrestricted market. The CRA tells owners to keep records of the value on the date they inherit property. If the estate sells the property after death, gains on that sale are reported on the estate's T3 return rather than on the final return.
- Ask the executor for the date-of-death value used on the final return.
- Keep any appraisal, broker statement or valuation report.
- Keep records of the sale price and selling costs when you eventually sell.
- Do not add routine repairs or maintenance to the cost base.
Exceptions that change the cost base
| Situation | Effect on cost |
|---|---|
| Property to a spouse or common-law partner resident in Canada | Rollover: the deceased is deemed to dispose at the adjusted cost base, and the spouse takes that same amount |
| Property to a qualifying spouse trust | The rollover also applies |
| Spouse not resident in Canada | No rollover; the ordinary deemed disposition applies |
| Farm or fishing property to a child | Legal representative can choose an amount between adjusted cost base and fair market value, and the child takes it at that amount |
The rollover applies only if the property vests indefeasibly in the spouse or trust within 36 months after death, or a longer period the Minister allows on written application. The legal representative may also elect that the rollover not apply, in which case proceeds are set at fair market value. For this purpose, child includes grandchildren, great-grandchildren and certain dependants. Resource property and land inventory have their own rules.
If your cost base came through a rollover, it may be much lower than the value at death, so a later sale can produce a larger gain than you expect. Ask which rule applied.
A home or cottage you inherit
A gain on the deceased's home may be fully or partly exempt, but the property must still be reported on Schedule 3 and designated on Form T1255, and the designation covers only years up to the date of death. Once you own the property, your own use as a principal residence is a separate question for future years.
A gain is fully exempt if the home was the principal residence for all years owned, or all but one, and no other property was designated for those years. A cottage or second property cannot be designated for a year in which another property of the family unit is designated, so part of the deemed gain on the other may be taxable on the final return.
What to do next
- Get a written statement of the value used for each asset you received.
- Find out whether a spousal rollover, farm election or opt-out election was used.
- Record the date you received the property.
- Keep records of the property's value as at that date.
- Speak with a lawyer or accountant before selling, especially for real estate, private shares or foreign property.
The CRA's guidance does not spell out what evidence must support the value on a final return, so a written appraisal or valuation is a sensible record to hold.
Frequently asked questions
Do I pay tax when I inherit property?
Generally the deemed gain is reported on the deceased's final return, not by the beneficiary. You may owe tax later when you sell, based on your cost base.
What is my cost if I inherit from my spouse?
If the property passes to a spouse or common-law partner resident in Canada under the rollover, the spouse is deemed to acquire it at the deceased's adjusted cost base, not its value at death. The representative can elect out of that rule.
Can I add renovations or repairs to the cost base?
Current expenses such as maintenance and repairs cannot be added to the adjusted cost base. Whether other costs qualify depends on their nature, so ask an accountant.
What if the property was worth less at death than the deceased paid?
The deceased's final return reports a loss, and you generally acquire the property at its value at death. The deceased's losses may be usable on the final return.
Sources
- Income Tax Act, s. 70 — Justice Laws (federal)
- CRA – Doing taxes for someone who died: Capital gains — canada.ca
- CRA – Doing taxes for someone who died: Capital gains / Report income — canada.ca
- CRA – Guide T4037, Capital Gains — 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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