Adjusted Cost Base of Inherited Property for Heirs in Canada

If you inherit a house, a cottage or an investment account, you may wonder what the property is treated as costing you. That number is your adjusted cost base, and it decides how much gain is taxed if you sell later.

The rules start with what happens on the death itself. Understanding that step first makes your own cost base easier to follow, and shows where the usual rule changes.

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

What happens to the property at death

On death, the person is treated as having sold each capital property immediately before death for its fair market value. The tax on any gain is carried by the final return, not by an inheritance tax.

The gain or loss is the fair market value on the date of death minus the adjusted cost base. It is reported on Schedule 3 and line 12700 of the final return. The deceased reports it on that return, not the beneficiaries.

How your adjusted cost base is set

A person who acquires property because of the death is treated as acquiring it at the time of death at a cost equal to its fair market value immediately before death. That figure is your adjusted cost base.

If you later sell, the CRA says you generally calculate your 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 the property in an open and unrestricted market. The CRA tells owners to keep records of the fair market value on the date they inherit. How to best support a value for something like private company shares or a cottage depends on the facts, so it is worth asking an accountant or lawyer.

When the rule is different

For the spousal rollover, 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. The legal representative can also elect on the final return that the rollover not apply, property by property, so that market value is used instead. That can be useful to use the deceased's losses or lower rates on the final return.

For farm and fishing property, the word child includes grandchildren, great-grandchildren and certain dependants.

Homes, cottages and the principal residence exemption

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. The designation covers only years up to the date of death.

A home's gain is fully exempt if it was the principal residence for all years owned, or all but one, and no other property was designated for those years by the owner or a family member.

A family can designate only one property for each year, so where a family owns a home and a cottage, part of the deemed gain on the other may be taxable on the final return. Which property to designate is a decision worth reviewing with an accountant before the return is filed.

What to do next

• Ask the executor for the fair market value used for each property on the final return.
• Keep the valuation records and any appraisal for the date of death.
• Keep a separate record of repairs and maintenance, remembering they do not raise your cost base.
• Find out whether the spousal rollover was used, since that changes your starting cost.
• Remember that gains on property the estate sells after death are reported on the estate's T3 return, not the final return.
• Speak with an accountant or lawyer before selling, especially for a cottage, farm or private company shares.

Frequently asked questions