- On death, the person is treated as having sold their capital property at fair market value just before death, even though no sale happens.
- The resulting capital gains tax falls on the deceased's final return and is paid from the estate, not by the heir.
- Property passing to a Canadian-resident spouse or common-law partner can roll over at adjusted cost base instead, with conditions.
If you are inheriting a property or investments, you may worry that a tax bill is coming to you. For capital gains on the deceased's property, the answer is usually that the tax is dealt with by the estate, before you receive your share.
This article explains the deemed sale on death, who pays, how it is reported, and the main exception for spouses and common-law partners. The federal rules apply the same way in Alberta.
This article covers the law of Alberta.
The deemed sale on death
When a person dies, the CRA considers them to have sold all their property just before death, even though no sale occurs. This is called a deemed disposition, and it may create a capital gain or loss.
Under section 70(5) of the Income Tax Act, the deceased is treated as having disposed of each capital property for proceeds equal to its fair market value at that time. The person who acquires it is treated as acquiring it at that fair market value.
Who pays the tax
The capital gains tax from the deemed disposition falls on the deceased's final return, so it is paid out of the estate. It does not fall on the heir.
The legal representative reports the gain or loss on Schedule 3 and line 12700 of the final return. The gain or loss is the fair market value on the date of death minus the adjusted cost base. Under the CRA's current position, the inclusion rate is one-half, and the planned increase was cancelled.
Beneficiaries are generally taxed only on amounts paid to them that the estate deducts. In practical terms, expect the estate to pay the tax first, which can reduce what is left to distribute.
What happens when you later sell
Because you take the property at its fair market value from the final return, that value becomes your starting cost. If you later sell, you report the sale on your own T1 return using that value.
If the estate sells property after death, the estate reports those sales on a T3 return. Who reports a sale therefore depends on whether the estate or the beneficiary sells.
| Event | Who reports it |
|---|---|
| Deemed sale at death | Legal representative, on the final return |
| Sale by the estate after death | The estate, on a T3 return |
| Later sale by a beneficiary | The beneficiary, on their own T1 |
The spousal rollover exception
Property passing to a Canadian-resident spouse, common-law partner or qualifying spousal trust is deemed disposed of at adjusted cost base, not fair market value. The recipient takes that cost.
There are conditions. The spouse or common-law partner must be a resident of Canada at death, and the property must be locked in for them no later than 36 months after the date of death.
The legal representative can also elect in the deceased's return not to use the rollover, so the deemed disposition at fair market value applies instead. The election is made property by property. Other special rules may apply to qualified farm or fishing property, and gains on a home may be fully or partly exempt.
On losses, no capital loss can be claimed on personal-use property unless it is listed personal property. On the final return and the prior-year return, net capital losses can reduce other sources of income, not just capital gains.
What to do next
- Ask the executor which assets are capital property and whether tax is expected on the final return.
- Ask whether any property is passing to a spouse or common-law partner and whether the rollover will be used.
- Keep records of the fair market value at death for anything you receive, since it is your starting cost.
- Expect the executor to settle the tax before distributions, and ask about timing.
- Speak with a lawyer or accountant before selling inherited property.
Frequently asked questions
Do I pay capital gains tax when I inherit a property?
Generally no. The tax on the deemed sale falls on the deceased's final return and is paid from the estate, not by the heir. You report a gain only if you later sell, using the fair market value from the final return as your starting cost.
Who reports the gain on the final return?
The legal representative reports it on Schedule 3 and line 12700 of the deceased's final return.
Does the spousal rollover always apply?
No. It requires the spouse or common-law partner to be a Canadian resident at death and the property to be locked in for them within 36 months of death. The legal representative can also elect out, property by property.
What if the estate sells the property?
Sales by the estate after death are reported by the estate on a T3 return.
Sources
- Income Tax Act, s. 70 — Justice Laws (federal)
- CRA – Deemed disposition of property for deceased taxpayers — canada.ca
- CRA – Taxable capital gains on property, investments, and belongings — canada.ca
- CRA – Line 12700 capital gains — canada.ca
- CRA – Death benefits — 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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