Taxable capital gains on property, investments, and belongings - Prepare tax returns for someone who died
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Prepare tax returns for someone who died
- What returns you need to file
- Filing and payment due dates
- Report income, transfers, and dispositions
- Claim deductions and tax credits
- File the returns
- After you file
Taxable capital gains on property, investments, and belongings
Capital property includes real estate property, such as homes and cottages, investments like mutual funds or crypto-assets, and personal belongings like artwork, collections or jewelry. When a person dies, they are considered to have sold all their property just prior to death, even though there is no actual disposition or sale. This is called a deemed disposition and may result in a capital gain or capital loss, unless the property or asset is transferred to a spouse or common-law partner or a specific exception applies.
On this page
- Determine if property is transferred to the surviving spouse or common-law partner
- Designate a principal residence
- Calculate and report capital gains or capital losses on the Final Return
- Reduce taxable income with capital loss deductions
- Report sales after the death on a T3 Return
- Report sales after transfer to a beneficiary
Determine if property is transferred to the surviving spouse or common-law partner
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If property or assets are transferred to the spouse or common-law partner
Property transferred to a surviving spouse or common-law partner who is a resident of Canada at the time of the death (or a certain trust) may not result in a capital gain or capital loss in the Final Return.
For the transfer to occur on a tax-deferred basis, the property must be locked-in for the spouse or common-law partner no later than 36 months after the date of death. The capital gain or capital loss is postponed until the spouse or partner sells or is deemed to sell the property.
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If property or assets are transferred to other beneficiaries
Capital property (such as real estate, investments, or personal belongings) owned by the person who died is considered to be disposed of by that person immediately before their death at fair market value, and may result in a capital gain or a capital loss which must be reported on Schedule 3 of the Final Return.
Refer to Calculate and report capital gains or capital losses on the Final Return.
As an alternative, you may transfer the property to a trust on a tax-deferred basis if all the following conditions are met:
- The testamentary spousal or common-law partner trust is resident in Canada immediately after the property becomes locked-in for this trust
- The property becomes locked-in for the testamentary spousal or common-law partner trust no later than 36 months after the date of death
- The spouse or common-law partner of the person who died is entitled to receive all of the income of the trust
- During the life of the surviving spouse or common-law partner, no other person may receive or otherwise obtain the use of any of the income or the capital of the trust
If the property will not be locked-in within 36 months
If the property will not be locked-in within 36 months, a request for an extension may be considered if you, as the legal representative:
- write a request to the director at your Tax Services Office, and
- make the request as soon as possible before the end of the 36-month time period
If the property is not locked-in within 36 months and an extension is not granted, the capital gain or capital loss realized on death must be reported in the deceased’s Final Return.
How to report the tax-deferred capital gain if the transfer qualifies
The disposition of the person’s property or assets will still need to be reported as a part of Schedule 3 of the Final Return. However, the proceeds are deemed to be the same as the property's adjusted cost base right before the owner’s death. As a result, the capital gain or capital loss reported on Schedule 3 will be zero.
Designate a principal residence
If the person who died owned a principal residence, some or all of the capital gain on that principal residence may be exempt from tax. Even where the entire gain is exempted by a principal residence designation, you must still designate the property as a principal residence in the Final Return by completing both:
- page 2 in Schedule 3, Capital Gains (or Losses)
- Form T1255, Designation of a Property as a Principal Residence by the Legal Representative of a Deceased Individual
For more information on the reporting requirements when there is a disposition of a principal residence, see Chapter 6 of Guide T4037, Capital Gains, and Income Tax Folio S1-F3-C2, Principal Residence.
A principal residence may include any of the following types of housing units:
- A house
- A cottage
- A condominium
- An apartment in an apartment building
- An apartment in a duplex
- A trailer, mobile home, or houseboat
A property qualifies as a principal residence for any year if it meets all of the following 4 conditions:
- It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation acquired only to get the right to inhabit a housing unit owned by that corporation
- The person who died owned the property, whether alone or jointly with another person
- The person who died, or their current or former spouse or common-law partner, or any of their children ordinarily inhabited it during the year
- You designate the property as the principal residence
The land on which the home is located can be part of the principal residence. Usually, the amount of land that counts as part of the principal residence is limited to half of a hectare (1.24 acres). However, if you can show that more than half a hectare of land was necessary for the home to fulfil its function as a residence, you can consider more than this amount as part of the principal residence. For example, this may happen if the minimum lot size imposed by a municipality at the time the person who died bought the property is larger than half of a hectare. For additional information, refer to paragraphs 2.33 – 2.35 of Income Tax Folio S1-F3-C2, Principal Residence.
Special circumstances for principal residences
The deceased person’s principal residence designation only applies until the date of death.
After the date of death, for the residence to continue to be a principal residence:
- the beneficiary may, if they meet the required conditions, designate the property as their principal residence
- if the residence goes to a trust, refer to paragraphs 2.65 to 2.66.4 of the Income Tax Folio S1-F3-C2, Principal Residence
Transfer to spouse or common-law partner
Where the principal residence is transferred to the spouse or common-law partner of the person who died, or to a testamentary spousal or common-law partner trust:
- A principal residence designation for the period before death is not required in the Final Return
- The deemed disposition of the property and any capital gain or capital loss is not required in the Final Return
A record should be kept of the years for which the person who died would have been eligible to make a principal residence designation for the particular property.
Calculate and report capital gains or capital losses on the Final Return
- Found on slips
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T3, T4PS, T5, and T5013. Refer to Chart 1 - Reporting capital gains (or losses) and other amounts from information slips for more details.
Capital gains may result from transactions in which no tax slips are issued
- Report on line
- 12700 and Schedule 3 of the deceased's Final Return
The taxable portion of capital gains are included in income
A person who died is considered to have disposed of all the property they own right before death. This is called a deemed disposition. If the person who died owned capital property (such as real estate, investments or personal belongings), the deemed disposition can result in a capital gain or capital loss.
Generally, a change in the fair market value of a capital property between the time it was purchased or acquired and the date of death results in a capital gain or capital loss, which must be reported in the Final Return of the person who died. One-half of the capital gain is taxable and is referred to as the taxable capital gain. One-half of a capital loss is referred to as an allowable capital loss.
You may report a nil capital gain in the Final Return if capital property was transferred to a surviving spouse or common-law partner and certain conditions are met.
How to calculate capital gains
Use Schedule 3 to calculate the taxable capital gain to report on the Final Return. You must complete Schedule 3 based on the type of properties which the person who died actually disposed of, or was deemed to have disposed of, from January 1 to the date of death. Schedule 3 will provide the amount to be reported on line 12700.
A capital gain or capital loss for a deemed disposition of property at death is calculated in Schedule 3 as:
- the proceeds or deemed proceeds of disposition (the fair market value of the capital property on the date of death)
- minus the adjusted cost base (the cost of a property plus any expenses to acquire it, such as commissions and legal fees)
- equals capital gain or capital loss
The cost of a capital property (such as real estate, investments, or personal belongings) is its actual or deemed cost when it was purchased, or otherwise acquired. In addition to the cost, the ACB also includes capital expenditures made for the property, such as the cost of additions and improvements to the property.
You cannot add current expenses, such as maintenance and repair costs, to the ACB of a property.
Determine what property needs to be included in the calculation
The following are examples of the types of capital property you might need to report on Schedule 3:
Real estate might need to be reported in 2 different ways:
Personal-use property
Real estate that the person who died owned for their personal use or enjoyment is considered personal-use property.
Gains or losses from real estate that is personal-use property are reported the same way as personal belongings and property.
You cannot claim a capital loss on personal-use property.
If the real-estate was the principal residence of the person who died, you must report the disposition on Schedule 3, although all or part of any capital gain on the property may be exempt from tax.
Property used to earn income
Capital gains or losses on real estate or other property, other than a principal residence and personal-use property, need to be reported on Schedule 3. Real estate, depreciable property and other property includes:
- vacant land
- rental property (both land and buildings)
- farm property, including both land and buildings (other than qualified farm or fishing property)
- commercial and industrial land and buildings
It does not include:
- personal-use property (such as a cottage)
- the sale of mortgages and other similar debt obligations on real property
For each real property deemed disposed of on the date of death that includes land and a building, you must:
- determine how much of the selling price relates to the land and how much relates to the building
- report the disposition of your land and building separately on Schedule 3 in lines 13599 and 13800
To help understand how to report a disposition of real property that includes land and a building, see the example Disposing of a principal residence partly used for earning income.
Contact us about special rules for properties owned by the person who died, which were acquired before 1972
There are special rules for property that the person who died had owned since before 1972. For details about these rules and for information about other property such as resource property or an inventory of land, contact the CRA.
Depreciable property
In addition to reporting capital gains, a deemed disposition of capital property used to earn rental or business income may also result in the reporting of recapture of capital cost allowance (CCA) or terminal loss amounts. This includes real estate (other than land) as well as other capital property, such as equipment, used to earn income.
Recapture of capital cost allowance and terminal loss on rental property
Report a recapture of CCA or a terminal loss for rental property in Form T776, Statement of Real Estate Rentals.
For more details on how to calculate an Undepreciated Capital Cost on rental properties, refer to Guide T4036, Rental Income.
Recapture of capital cost allowance and terminal loss on property used to earn business income
Report a recapture of CCA or a terminal loss for business property (such as equipment) in Form T2125, Statement of Business or Professional Activities:
- On line 8230 include the recaptured CCA
- On line 9270 include the terminal loss
For more details on how to calculate your Undepreciated Capital Cost, refer to Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income.
Personal belongings and property
Any capital gains on personal belongings or property must be reported. This might include gains on personal-use property or listed personal property.
Personal-use property is capital property that is owned primarily for their personal use or enjoyment. Listed personal property is a type of personal-use property that generally increases in value over time. Listed personal property includes all or any part of any interest in, or any right to, the following properties: prints, etchings, drawings, paintings, sculptures, or other similar works of art, jewellery, rare folios, rare manuscripts, rare books, stamps, or coins.
You cannot claim a capital loss on personal-use property, unless it is considered listed personal property:
- Report personal-use property (furniture, cars, boats, cottages, etc.) on line 15800 of Schedule 3
- You are not allowed to offset personal-use property gains with personal-use property losses
- Report listed personal property (jewellery, stamp and coin collections, etc.) on line 15900 of Schedule 3
- You may offset listed personal property gains with listed personal property losses, in your line 15900 calculation
Refer to personal-use property in Guide T4037, Capital Gains for specific rules on how to calculate gains on personal-use property.
If the items of the deceased were used to earn income, such as equipment used in a business, they should be reported like other depreciable property.
Investments
Capital gains on investments made outside of a registered plan or TFSA must be reported as part of the Final Return. This includes capital gains on:
- Shares
- Mutual funds
- Deposit certificates
- Treasury bills
- Bonds
Report these dispositions on lines 15199 and 15300 of Schedule 3.
Reserves claimed in the year before death are brought back into income in the year of death
When capital property is sold, sometimes some of the proceeds are not payable until after the year of sale. In this case, a person can sometimes defer part of the capital gain by calculating and claiming a portion of the amount of the proceeds that are not payable until a later year. This is called a reserve.
You can have reserves on capital gains as well as self-employment income.
Determine if the person who died had reserves that need to be reported
You can generally see amounts of reserves claimed in prior years by reviewing prior year Notices of Assessment. This can be done in Represent a Client.
Report reserves claimed in the year before death on the Final Return
Reserves claimed in the year prior to the person's death must be included in income on the Final Return.
Complete Form T2017, Summary of Reserves on Dispositions of Capital Property.
Refer to reserves for Qualified Farm or Fishing Property (QFFP) or Qualified Small Business Corporation Shares (QSBCS) income on how to claim a capital gains deduction on reserves for QFFP or QSBCS brought into income in the year of death.
In most cases, you cannot deduct a reserve in the year of death, however, it may be done with a joint election.
For further details on calculating capital gains for specific types of capital property, refer to Disposing of personal-use property in Guide T4037, Capital Gains.
Property exempt or partially exempt from capital gains
You may not have to pay tax on the disposition of the following properties, but you still have to report the disposition:
Refer to Designate a principal residence.
Qualified Farm or Fishing Property (QFFP)
If the person who died had land or property used in a farming or fishing business, there may be special rules that apply upon the disposition or deemed disposition of that property. Refer to Farming or fishing income and property for both the elected amount for transfer to a child and the lifetime capital gains deduction that is available for qualified farm or fishing property up to the lifetime capital gains deduction limit.
Qualified Small Business Corporation Shares (QSBCS)
If the person who died had Qualified Small Business Corporation Shares, and where the disposition of the QSBCS resulted in a capital gain you might be eligible for the lifetime capital gains deduction up to the lifetime capital gains deduction limit.
Find out how to apply the lifetime capital gains deduction.
A reserve brought into income relating to property used in a farm or fishing business or QSBCS
You might be eligible to claim a capital gains deduction if you include reserves from the disposition of certain property in income on:
- Property used in a farm or fishing business
- Qualified Small Business Corporation Shares (QSBCS)
Reserves (joint election)
When capital property is sold, sometimes some of the proceeds are not payable until after the year of sale. In this case, a person can sometimes defer part of the capital gain by calculating and claiming a portion of the amount of the proceeds that are not payable until a later year. This is called a reserve.
You can have reserves both on capital gains as well as self-employment income.
Joint election to claim eligible reserves in the year of death
In most cases, you cannot deduct a reserve in the Final Return of the person who died.
However, where the right to receive the proceeds of disposition or the income owing is transferred to a spouse or common-law partner, or spousal or common-law partner trust and certain conditions are met, the legal representative and the transferee (beneficiary) can make a joint election to claim a reserve on the Final Return of the person who died.
The transferee (beneficiary) must bring the reserve back into their income in the tax return for the first year after death. Report the capital gain in the return of the spouse or common-law partner, or spousal or common-law partner trust.
Eligibility for the joint election
To do this, the following conditions must be met:
- The person who died was a resident of Canada on the date of death
- The right to receive the proceeds of disposition or the income owing is transferred to the spouse of the person who died or common-law partner, or to a spousal or common-law partner trust
- If a transfer to a spouse or common-law partner, that person also has to have been a resident of Canada immediately before the person's death
- If a transfer to a spousal or common-law partner trust, the trust has to be resident in Canada immediately after the proceeds or income become locked-in for the trust
How to make the joint election
To make the joint election, complete Form T2069, Election in Respect of Amounts Not Deductible as Reserves for the Year of Death, and attach a copy to the Final Return of the person who died.
Deduct the reserve from income in the calculation in Form T2017, Summary of Reserves on Dispositions of Capital Property. Refer to How do you calculate and report a reserve for details on the calculation.
Reduce taxable income with capital loss deductions
Before you can claim a capital loss, you must calculate capital gains or capital losses for the Final Return.
Unlike in returns for other years, net capital losses in the Final Return and for the return of the year before the death can also be applied to reduce sources of taxable income other than capital gains. Refer to Net capital losses to find out how to claim capital loss deductions in the Final Return and the return for the year before the death.
Report sales after the death on a T3 Return
If any capital property (such as real estate, investments or personal belongings) is sold after the date of death by the trust or estate, you must report the capital gain in line 1 of a T3 Trust Income Tax and Information Return (T3 Return) for the estate.
The capital gain on the sale is generally the difference between the sale price and the fair market value (plus costs related to the disposition, if any) that you reported for the property on the Final Return.
Many of the forms available above for capital gains on the Final Return have equivalent forms for the T3 Return:
- Calculate a trust's capital gains in T3 Schedule 1, Dispositions of Capital Property
- T3 Schedule 2, Reserves on Dispositions of Capital Property
- Form T1079, Designation of a Property as a Principal Residence by a Personal Trust
For more detail on calculating capital gains in a T3 Return, refer to:
Capital losses in the T3 Return can be carried back to the Final Return
Refer to Net capital losses transferred from the first tax year of a Graduated Rate Estate.
Report sales after transfer to a beneficiary
If any capital property (such as real estate, investments or personal belongings) is sold by the beneficiary after the distribution of the estate, the beneficiary must report the disposition in their T1 Income Tax and Benefit Return (T1 Return). The capital gain on the sale is generally the difference between the sale price and the fair market value (plus costs related to the disposition, if any) that you reported for the property on the Final Return. Refer to Property you inherit or receive as a gift.
Locked-in
- Locked-in
- Locked-in
The testamentary spousal or common-law partner trust
- The testamentary spousal or common-law partner trust
- The testamentary spousal or common-law partner trust
Spouse
- Spouse
- Spouse
Common-law partner
- Common-law partner
- Common-law partner
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- Date modified:
- 2024-01-23