Who Pays Capital Gains Tax When Someone Dies in Canada?

When a person dies owning a home, a cottage, shares or a business, executors and heirs often ask who is responsible for the capital gains tax. The answer depends on when the gain arises: at death, after death, or when a beneficiary later sells.

This article walks through those three stages so you can see which return carries each gain, and what exceptions can reduce or defer the tax.

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

The gain at death belongs on the final return

On death, a taxpayer is deemed to have disposed of each capital property immediately before death for proceeds equal to its fair market value. The CRA says the gain or loss is the fair market value on the date of death minus the adjusted cost base, reported on Schedule 3 and line 12700 of the final return.

The gain is reported by the deceased on the final return, not by the beneficiaries. The legal representative generally deals with the final return, and how the tax is funded from the estate depends on your situation, so it is worth confirming with a lawyer or accountant.

Gains after death go on the estate's return

Income the estate earns after death, and gains on property the estate sells after death, are reported on the estate's T3 Trust Income Tax and Information Return, with capital gains on T3 line 1 using T3 Schedule 1, not on the final return.

The T3 return is due 90 days after the trust's year-end. A late T3 can attract an alternative penalty of $25 per day (minimum $100, maximum $2,500), even with no balance owing.

What beneficiaries may owe later

A person who acquires property because of the death is deemed to acquire it at a cost equal to its fair market value immediately before death. When a beneficiary later sells, the CRA says gain or loss is generally the sale price minus the fair market value reported on the final return.

This is why records of the date-of-death value matter. The CRA tells owners to keep records of the fair market value of property on the date they inherit it.

Ways the tax can be reduced or deferred

• Spouse or common-law partner rollover: property transferred as a consequence of death to a spouse or common-law partner who was resident in Canada immediately before the death is deemed disposed of at its adjusted cost base (or, for depreciable property, the lesser of capital cost and cost amount), and the spouse is deemed to acquire it at that same amount. It applies only if the property vests indefeasibly in the spouse or a qualifying spouse trust within 36 months after death, or a longer period the Minister allows on written application. The legal representative may elect in the final return, property by property, that the rollover not apply, so that the property is treated as sold at fair market value. A non-resident spouse does not qualify.
• Principal residence: a gain on the deceased's home may be fully or partly exempt, but it must still be reported on Schedule 3 and designated on Form T1255, and the designation covers only years up to the date of death.
• Home and cottage: only one property of the family unit can be designated for each year, so part of the gain on the other may be taxable.
• Farm or fishing property passing to a child: the legal representative can choose deemed proceeds between the adjusted cost base and fair market value within set limits.
• Capital gains deduction: gains on qualified small business corporation shares or qualified farm or fishing property may qualify, claimed on line 25400 using Form T657.
• Losses: net capital losses on the final return and the prior year's return can offset income other than capital gains, which is not normally allowed in other years.

If a graduated rate estate sells capital property in one of its first three taxation years and its capital losses exceed its gains, the legal representative may elect to treat part of the excess as the deceased's loss on the final return, and the final return must then be amended. Which of these applies depends on the facts, so ask a lawyer or accountant.

Deadlines, liability and next steps

For a death from January 1 to October 31, filing and payment are due April 30 of the following year. For a death from November 1 to December 31, the return is due 6 months after the date of death. If the deceased or the spouse or common-law partner living with them carried on a business on the date of death, the filing date is June 15 of the following year for deaths from January 1 to December 15, and 6 months after death for deaths from December 16 to December 31, but the payment date does not change.

Before distributing property, the representative must obtain a clearance certificate, requested on Form TX19. Without it, the representative can be personally liable for the amounts to the extent of the value of property distributed.

• Gather date-of-death valuations for every capital property.
• Find the adjusted cost base for each property.
• Note which assets go to a spouse and whether to opt out of the rollover.
• Decide how the home or cottage will be designated.
• Keep estate-period sales separate for the T3 return.
• Get advice before distributing property.

Frequently asked questions