Deemed Disposition on Death: Inheritance and ACB

Canada does not have an estate or inheritance tax. Instead, the deemed disposition rule applies: the deceased person is treated as having sold all their capital property at fair market value (FMV) immediately before death.

This means:

• Any unrealized capital gains become taxable on the final return
• The estate or executor must file a "terminal return" for the year of death
• The beneficiary inherits the property with a new cost base equal to the FMV at date of death
• The beneficiary pays no tax on receipt — only when they eventually sell

If the property passes to a surviving spouse or common-law partner (or a spousal trust), the deemed disposition does NOT occur. Instead:

• The property transfers at the deceased's ACB (not FMV)
• No capital gains tax is triggered on death
• The surviving spouse inherits the original ACB
• The gain is deferred until the surviving spouse eventually sells or dies

This is automatic — it applies unless the executor elects OUT of the rollover on the final return. In some cases, the executor may elect to trigger the gain on death (e.g., to use up the deceased's capital losses).

Important: This rollover also applies to RRSP/RRIF transferred to a surviving spouse — no immediate tax on the deregistration.

For non-spousal beneficiaries:

• ACB = FMV on the date of death
• This is a "stepped-up" basis — all prior unrealized gains are wiped clean for the beneficiary
• The beneficiary's future gain is only the appreciation after the date of death

For spousal beneficiaries (rollover applies):

• ACB = Deceased's original ACB
• The surviving spouse inherits the full embedded gain
• When they sell, the gain dates back to the deceased's original purchase

Finding the date-of-death FMV: Use the closing price on the date of death (or if markets were closed, the average of the bid and ask from the last trading day). For mutual funds, use the NAVPS on the death date.

RRSP/RRIF: The full fair market value of the plan is included in the deceased's income on the final return (taxed as ordinary income, not capital gains). Exceptions:

• Transfer to surviving spouse (rollover — no tax)
• Transfer to financially dependent child/grandchild (special rules apply)

TFSA: No tax on death. The TFSA balance passes to the named beneficiary tax-free. If the spouse is named as "successor holder," the TFSA continues as theirs without any tax event. If another person is named beneficiary, the account is collapsed and paid out — any growth AFTER the date of death is taxable to the beneficiary.

• Maximize TFSA: TFSA assets are tax-free on death — more here means less capital gains exposure
• Name spouse as beneficiary or successor: Defers all tax until the second death
• Charitable donations in the year of death: The 75% net income limit rises to 100%, allowing large donation credits to offset the final tax bill
• Donate appreciated securities on death: 0% inclusion + donation credit eliminates the tax entirely for donated positions
• Use capital losses: Any capital losses in the year of death can offset gains from other years (carry-back to any year for the final return)
• Graduated Rate Estate (GRE): The estate can access graduated tax rates for up to 36 months if it qualifies as a GRE
• Life insurance: Not subject to tax and can fund the estate's tax bill without forced asset sales

The principal residence exemption still applies on death. If the deceased lived in the home as their principal residence for every year they owned it, the capital gain is fully exempt — no tax, regardless of how much it appreciated.

If the property was a principal residence for only part of the ownership period (e.g., it was rented for some years), a partial exemption applies using the standard formula:

• File a terminal return (T1) for the year of death — reporting all income and deemed dispositions
• Obtain a clearance certificate from the CRA before distributing estate assets (protects executor from personal liability)
• Calculate FMV of all capital property at date of death
• Determine whether spousal rollover applies to specific assets
• Consider electing OUT of spousal rollover if beneficial (e.g., to use capital losses)
• Inform beneficiaries of their new ACB (FMV at death)