Executor Fights a $12,000 Capital Gain on a Collingwood Cottage

The situation

Tharshini worked as a call-centre representative and had never handled anything more complicated than her own income tax return when her father, Kajan, died and named her executor of his estate. An executor is the person responsible for winding up someone's affairs after death: collecting assets, paying debts, filing the final tax return, and distributing what's left to the beneficiaries. Her sister Simone, a transit operator, was a co-beneficiary and helped where she could, but the legal responsibility sat with Tharshini alone.

Kajan's estate was modest. He owned the small house he had lived in for years, plus a second property near Collingwood that the family used as a weekend retreat for part of the time he owned it before renting it out for several years and then moving in as his full-time residence for the final stretch before his death. A tax preparer filed the estate's final return, sometimes called the terminal return, reporting no taxable gain on the Collingwood property on the basis that it had been his principal residence throughout his ownership.

About a year later, a reassessment arrived. The Canada Revenue Agency, referred to here as the CRA, had reviewed the return and disagreed. In its view, the property had not been Kajan's principal residence for the entire period he owned it — only for the final years, after the rental use ended. The reassessment added a capital gain to the estate's income for the years the exemption didn't apply, and it came with a bill for additional tax of roughly $12,000, plus arrears interest that had been accumulating since the original filing.

What the reassessment got wrong — and right

The principal residence exemption lets a taxpayer avoid capital gains tax on the sale (or, on death, the deemed disposition) of a property that was their principal residence for the years they owned it. A property can only be designated as a principal residence for a given year if the owner "ordinarily inhabited" it that year — a fact-specific test, not a formality. Years when a property is rented out to someone else generally don't qualify, because the owner isn't living there.

The CRA's position had a real basis: bank records and a rental listing showed the Collingwood property had been leased to tenants for several years in the middle of Kajan's ownership. During that stretch, he lived full-time at his primary house. The exemption genuinely didn't apply for those years, and the estate's original return had claimed it for the whole ownership period without carving out the rental years — an honest mistake by whoever prepared the return, not fraud, but a mistake with a real tax cost attached.

Where the reassessment went too far was in calculating the gain as if none of the ownership period qualified for the exemption. Tharshini had photographs, utility bills, and a change-of-address record showing Kajan had moved back into the Collingwood property and lived there as his only residence for the final few years before he died — years the CRA's reassessment had also excluded from the exemption. If those years counted, the taxable portion of the gain would shrink substantially, and so would the tax owing. As executor, Tharshini was legally on the hook to resolve this before the estate could be distributed; a clearance certificate — confirmation from the CRA that all tax owing has been paid — is generally needed before an executor can safely hand out what remains to the beneficiaries without risking personal liability for unpaid tax.

What we did

1. Filed a notice of objection within the deadline. A notice of objection is the formal first step in disputing a CRA reassessment — a written explanation of what the taxpayer disagrees with and why, filed within a strict deadline after the reassessment is issued. Missing that deadline generally forecloses the right to object at all, so this came first, before anything else, while we gathered the supporting evidence.
2. Rebuilt the ownership and occupancy timeline. We worked with Tharshini and Simone to assemble a year-by-year record of who lived in the Collingwood property and when: the rental listing and lease dates, the utility accounts in Kajan's name after he moved back, his updated driver's licence address, and mail forwarding records. The goal wasn't to dispute the rental years — those were fairly claimed by the CRA — but to establish clearly which years on either side of the rental period qualified for the exemption.
3. Made the case to the CRA's Appeals Division. The objection went to an appeals officer, a different CRA employee than the one who did the original reassessment, tasked with reviewing the file independently. We presented the timeline and argued for a partial exemption — full relief for the confirmed principal-residence years, none for the rental years — rather than the all-or-nothing position in the original reassessment.
4. Escalated to the Tax Court of Canada when the objection stalled. The appeals officer's initial response conceded some ground but not enough, and Tharshini was still facing several thousand dollars more tax than the corrected timeline supported. Because the amount in dispute was modest, the case qualified for the Tax Court of Canada's informal procedure — a simplified stream designed for smaller disputes, with relaxed rules of evidence, no requirement for a lawyer, and generally a faster path to a hearing than the court's general procedure. We filed the notice of appeal and prepared Tharshini to represent the estate.
5. Negotiated a settlement before the hearing date. With a hearing scheduled and the documentary record assembled, the CRA's counsel and our team discussed a compromise: the CRA agreed to extend the exemption to cover most, though not all, of the disputed years, based on the strength of the occupancy evidence for some periods and its weakness for others where records were thinner. Settling avoided the cost, delay, and uncertainty of an actual hearing for both sides.

The outcome

The settlement brought the estate's tax bill down from the original reassessed amount of roughly $12,000 to about $6,500, once the recalculated gain and adjusted interest were applied. That's not a clean win — the estate still owed real money it hadn't expected to owe, and some of the rental-year gain stuck regardless of how compelling the surrounding evidence was for the years just before and after. But it was a meaningful improvement over both the original reassessment and the appeals officer's first offer, and it reflected a genuine, defensible reading of a mixed evidentiary record rather than a coin flip.

Tharshini paid the reduced amount from estate funds before the assets were distributed, and the CRA subsequently issued the clearance certificate she needed to close out the estate without personal exposure to a later tax claim. The whole process, from the first reassessment letter to the negotiated settlement, took a little over a year — slower than she had hoped, but not unusual for a matter that moved through both the objection stage and a Tax Court filing before resolving.

For Simone, the practical effect was a smaller inheritance than the family had originally expected, since the extra tax came off the top of the estate before distribution. Neither sister was thrilled with that outcome, but both understood, by the end, why the compromise made more sense than pushing for a hearing over a few thousand dollars that could easily have cost as much in time and stress as it might have recovered.

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