- The deceased is treated as having sold each capital property just before death at fair market value.
- The gain is reported on Schedule 3 and the taxable portion goes on line 12700 of the final return.
- Property passing to a spouse or common-law partner can roll over at cost, though the representative can elect out.
Many people are surprised to learn that nothing needs to be sold for the tax system to treat a death as a sale. If you are the executor of a British Columbia estate, this idea, called deemed disposition, shapes the final tax return.
This article explains the rule in plain words, the main exception for spouses, and how some related items such as RRSPs fit in. Your accountant or lawyer can apply it to the specific assets.
This article covers the law of British Columbia.
The basic rule
Under s. 70(5)(a) of the Income Tax Act, a taxpayer is deemed to have disposed of each capital property immediately before death for proceeds equal to its fair market value at that time.
The CRA describes this as the deceased being considered to have sold all property just before death, even though there is no actual sale. The gain is the fair market value less the adjusted cost base.
Separately, British Columbia charges probate fees under the Probate Fee Act, calculated on the gross value of the estate. How the income tax rules and probate fees fit together for a particular estate depends on the situation, so it is worth confirming with a lawyer or accountant.
Where it shows up on the final return
The gain is reported on Schedule 3, and the taxable portion goes into income on line 12700 of the final return. The final return covers income from January 1 of the year of death up to the date of death.
Income the estate earns after death may have to be reported on a T3 return instead.
If the person died between January 1 and October 31, the final return is due April 30 of the year following the death. For a death between November 1 and December 31, it is due 6 months after the date of death. If the deceased, or a spouse or common-law partner living with them, was carrying on a business, the return for a death from January 1 to December 15 is generally due June 15 of the following year, although any balance owing is still due on the regular payment date. That later date is not available where the business's expenditures were mainly the cost or capital cost of tax shelter investments.
The spousal rollover and other exceptions
Under s. 70(6), capital property that vests indefeasibly in a spouse or common-law partner resident in Canada within 36 months after death is deemed disposed of at adjusted cost base. The Minister can allow a longer period on written application. No gain arises on the final return, and the spouse takes over the cost.
The legal representative can elect out of the automatic rollover, property by property, in the final return. Transfers to a qualifying testamentary spousal trust can also be tax-deferred.
| Situation | Result |
|---|---|
| Property goes to a non-spouse | Deemed sale at fair market value |
| Property vests in a Canadian-resident spouse or partner | Deemed disposed at adjusted cost base |
| Representative elects out | Rollover does not apply to that property |
Homes, rental property and cottages
Even if the whole gain on a home is exempt, the home must still be designated on Schedule 3 and Form T1255 in the final return. The deceased's designation applies only up to the date of death.
Rental property or vacant land is reported on Schedule 3 and is not treated as a principal residence. A cottage used for personal enjoyment is personal-use property, and a loss on it cannot be claimed.
If the home passes to a spouse or common-law partner on a rollover, the gain is reported as zero and a pre-death designation is not required in the final return, but a record of the years the deceased could have designated should be kept.
Losses and registered plans
Capital loss rules are more generous on death. Net capital losses from the final return or the prior year can offset income other than capital gains. Losses on personal-use property generally cannot be claimed, but losses on listed personal property such as art, jewellery, rare books, stamps and coins can offset gains from the same category.
An unmatured RRSP is handled differently. Its fair market value at death is included in income on line 12900, unless it passes as a tax-deferred refund of premiums to a qualifying beneficiary. A RRIF generally works the same way unless a spousal rollover applies.
For an RRSP, if all plan property goes directly to the spouse's or common-law partner's RRSP, RRIF or similar plan before the end of the year after death, no T4RSP is issued in the deceased's name. If the spouse is the estate's beneficiary rather than the named beneficiary, the spouse and the legal representative can jointly elect on Form T2019.
What to do next
- List every asset the deceased owned at death, with its value on the date of death.
- Find the adjusted cost base for each capital property.
- Identify which assets pass to a spouse or common-law partner.
- Decide with your accountant whether to elect out of the rollover for any property.
- File the final return by its due date, since late filing penalties apply.
The legal representative should apply for a clearance certificate on Form TX19 before distributing estate assets. If assets are distributed without one and tax is owing, the representative can be held personally liable for the outstanding tax balances, up to the value of the assets distributed. How this applies depends on your situation, so it is worth confirming with a lawyer or accountant.
Frequently asked questions
Does the estate have to sell the assets to trigger the tax?
No. The deceased is treated as having sold each capital property just before death, even though no actual sale takes place.
Is there a way to avoid the gain on property left to a spouse?
Capital property that vests in a Canadian-resident spouse or common-law partner within 36 months is generally deemed disposed of at adjusted cost base. The legal representative can elect out, property by property.
Where is the gain reported?
On Schedule 3, with the taxable portion going on line 12700 of the final return.
Is this the same as an estate or inheritance tax?
Not exactly. The tax arises through the deemed disposition and the final return, while British Columbia charges probate fees under the Probate Fee Act. An accountant can explain how this applies to your estate.
Sources
- CRA – How to manage the taxes of someone who has died (archived tax tip) — canada.ca
- CRA – Filing and payment due dates (someone who died) — canada.ca
- Income Tax Act, s. 70 — Justice Laws (federal)
- CRA – Deemed disposition of property — canada.ca
- CRA – Capital gains (someone who died) — canada.ca
- CRA – RRSP (someone who died) — canada.ca
- CRA – Amounts paid from an RRSP or RRIF upon the death of an annuitant — canada.ca
- CRA – RRIF (someone who died) — canada.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
This is a wills & estates question
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