When you pass away in Canada, the CRA treats it as if you sold all your investments and property at fair market value on the date of death, even though no actual sale occurred. This creates what's called a 'deemed disposition,' and your estate may owe capital gains tax on the increased value of those assets. Understanding this rule is crucial for estate planning, since the tax bill can be substantial and comes due within two years of your death. The CRA assumes you disposed of every capital asset you owned on the date of your death at its fair market value. Your estate must then calculate the capital gain (the difference between the fair market value at death and your adjusted cost base) and report it on your final tax return. This applies to: - Stocks, bonds, and mutual funds - Real estate (except your principal residence in most cases) - Cottages and vacation properties - Investment accounts and portfolios - Business assets - Cryptocurrency and digital assets Your principal residence is generally exempt from this rule, but all other property is subject to deemed disposition, regardless of whether your heirs actually sell anything.
Yes. A final tax return must be filed for the deceased within six months of their death, reporting all income earned up to the date of death plus any capital gains from deemed disposition. The executor or legal representative typically handles this.
The capital gains tax from deemed disposition is the estate's responsibility and is reported on the deceased's final return. However, if the estate doesn't have enough cash to pay it, heirs may need to contribute funds or the executor may need to sell assets.
No. The deemed disposition rule means the estate pays capital gains tax on the increased value at the time of death. The tax is owed regardless of whether you inherit the property or it's sold. However, your basis in the inherited property is stepped up to fair market value at death.
If a TFSA passes to a spouse, there's no tax on the growth inside it. RRSPs can be transferred to a spouse tax-free if named as beneficiary, deferring tax. Other beneficiaries will owe income tax on the RRSP balance, but capital gains tax does not apply to TFSA balances.
Fair market value is the price at which an asset would sell between a willing buyer and seller at the date of death. For publicly traded securities, it's typically the closing price on that date. For real estate or private businesses, an appraisal may be needed.