My client died this year. How is the deemed disposition at death taxed, and what changes if the property goes to the surviving spouse?
Under ITA 70(5), a 2026 death deems each capital property sold at fair market value, with half the gain taxed on the final return. Property vesting in a Canadian resident spouse or spousal trust within 36 months rolls over. An RRSP or RRIF is fully taxable unless it passes to the spouse or a financially dependent child or grandchild.
What does section 70(5) tax when someone dies?
Paragraph 70(5)(a) deems the deceased to have disposed of each capital property immediately before death for proceeds equal to its fair market value, and 70(5)(b) gives whoever acquires the property as a result of the death a cost equal to that same value laws-lois.justice.gc.ca. Nothing has to be sold. The CRA lists homes and cottages, stocks, mutual funds, crypto assets, art, collections and jewellery as typical capital property caught by the rule
canada.ca.
The gain is fair market value minus adjusted cost base, reported on Schedule 3 of the final return, and the result flows to line 12700 canada.ca. Under ITA 38(a) the taxable capital gain is one half of the gain, so the 50% inclusion rate applies to deaths in 2026 as it does to any other disposition
laws-lois.justice.gc.ca. Our page on the capital gains inclusion rate for 2026 covers the cancelled increase.
The deemed gain lands on the deceased, not on the heirs, and the heirs start over with a fair market value cost. Filing dates and what else goes on that return are on the final return for a deceased person page.
What happens to each type of property at death?
Who inherits decides the treatment. The table below sets the default rule beside the spousal rollover and shows where each amount is reported.
| Property | Left to anyone but the spouse | Left to a resident spouse or spousal trust | Where it goes on the final return |
|---|---|---|---|
| Shares, mutual funds, bonds, crypto | Deemed sold at FMV, half the gain taxable | Rolls over at ACB, gain of zero | Schedule 3, lines 15199 and 15300 |
| Rental property | Land and building deemed sold at FMV, plus recapture or terminal loss on the building | Land at ACB, building at the lower of capital cost and its cost amount | Schedule 3, lines 13599 and 13800, plus T776 |
| Business equipment | Recapture or terminal loss | Lower of capital cost and cost amount | T2125, line 8230 or 9270 |
| Cottage or other personal use property | Gain taxable unless designated as principal residence, losses denied | Rolls over at ACB | Schedule 3, line 15800 |
| Principal residence | Gain exempt for designated years, still reported | Rolls over, no designation needed on the final return | Schedule 3 and Form T1255 |
| Art, jewellery, coins, stamps (listed personal property) | Gain taxable, losses offset only listed personal property gains | Rolls over at ACB | Schedule 3, line 15900 |
| Unmatured RRSP | Full FMV is income (less any refund of premiums to a financially dependent child or grandchild) | Spouse can transfer it to their own RRSP or RRIF and deduct the transfer | T4RSP box 34, line 12900 |
| RRIF | Full FMV is income (less any designated benefit paid to a financially dependent child or grandchild) | Spouse can take over as successor annuitant | T4RIF box 18 |
The real estate, investment and personal property rows come from the CRA's page on capital gains at death canada.ca. The depreciable property figure for a spouse comes from 70(6), which sets proceeds at the lower of capital cost and cost amount so recapture is deferred too
laws-lois.justice.gc.ca. The RRSP and RRIF rows come from the CRA's RRSP page
canada.ca and RRIF page
canada.ca.
A financially dependent child or grandchild is the other exception. An RRSP amount paid to them because of the death is a refund of premiums under the ITA 146(1) definition, and 146(8.9) lets the legal representative deduct it from the amount taxed on the final return laws-lois.justice.gc.ca. The child reports it instead and may be able to defer the tax
canada.ca. The RRIF version is the designated benefit, which works the same way
canada.ca. Unless the child was dependent because of an impairment, the only transfer is a term annuity
canada.ca of no more than 18 years minus the child's age at purchase
canada.ca.
Qualified farm or fishing property left to a child resident in Canada has its own rollover under 70(9). The property must have been used principally in a Canadian farming or fishing business in which the deceased, spouse, child or parent was actively engaged on a regular and continuous basis, and it must vest in the child within 36 months. Proceeds default to cost, or the legal representative can elect an amount, often to use the lifetime capital gains exemption laws-lois.justice.gc.ca.
How much tax does a spouse defer on the same estate?
Your client dies in June 2026 holding a nonregistered portfolio with an ACB of $200,000 and a fair market value of $380,000, a cottage that cost $150,000 and is worth $550,000, and a RRIF worth $400,000. Assume the city home is designated as the principal residence for every year, so its gain is exempt and the cottage gain is fully exposed.
| Line | Widowed client, estate to the children | Client survived by a resident spouse who inherits everything |
|---|---|---|
| Portfolio gain ($380,000 minus $200,000) | $180,000 | $0 (rolls over at $200,000) |
| Cottage gain ($550,000 minus $150,000) | $400,000 | $0 (rolls over at $150,000) |
| Total capital gain | $580,000 | $0 |
| Taxable capital gain at one half | $290,000 | $0 |
| RRIF included in income | $400,000 | $0 if the spouse becomes successor annuitant |
| Added to the final return | $690,000 | $0 |
With no spouse, $690,000 lands on one return in one year, so most of it is taxed in the top bracket. The children take the portfolio at $380,000 and the cottage at $550,000, so a sale next year at those values produces no further gain.
With a spouse, nothing is taxed now. The spouse inherits the original $200,000 and $150,000 costs, and the full $580,000 of gain plus the RRIF is taxed when the spouse sells or dies. The rollover defers the tax. It does not remove it.
When does the spousal rollover apply, and when should you refuse it?
Subsection 70(6) applies automatically when the deceased was resident in Canada immediately before death and the property goes to a spouse or common law partner resident in Canada, or to a trust created by the will that is resident in Canada, where the spouse is entitled to all the trust income for life and nobody else can get income or capital while the spouse is alive. The property must vest indefeasibly within 36 months after death laws-lois.justice.gc.ca.
If the estate cannot meet the 36 months, ask the director of the Tax Services Office in writing for an extension before the period ends. The CRA says it may consider the request, and if the property does not vest and no extension is granted, the gain goes on the final return canada.ca. The disposition is still listed on Schedule 3 with proceeds equal to ACB, so the line shows a gain of zero.
Under 70(6.2) the legal representative can elect on the final return to have 70(5) apply instead laws-lois.justice.gc.ca. The election works property by property, never on a fraction of one property, and the spouse then takes the property at fair market value
canada.ca. Elect out when the final return has room to absorb a gain cheaply: unused net capital losses, the lifetime capital gains exemption on qualified small business shares or farm property, or low income in the year of death. Each election bumps the spouse's cost and shrinks the gain waiting on the spouse's own death.
How do losses and post death declines reduce the bill?
Net capital losses get a better deal at death. Losses from the final return and the year before death can be applied against income other than capital gains, after subtracting capital gains deductions claimed in all years canada.ca. So a carried forward loss bigger than the deemed gains can still shelter RRIF income. More detail on the carryover rules is on our net capital loss carryover page.
If the estate sells at a loss in its first taxation year, the legal representative can elect under 164(6) to carry the estate's net capital losses back to the final return. For deaths after August 11, 2024, the window is the estate's first three taxation years, and the losses can't go back past the year of death canada.ca. The estate must be a graduated rate estate for this to work.
RRSPs and RRIFs that fall in value after death get their own relief. If the total paid out is less than the fair market value included on the final return, the legal representative can ask to deduct the difference on the final return, generally where the final distribution happens by the end of the year after death canada.ca. For a RRIF the CRA notes Form RC249 may be needed
canada.ca.
Can the estate pay the tax on the deemed gains over time?
Yes. Under 159(5) the legal representative can elect to pay the tax arising from 70(2), 70(5) or 70(5.2) in up to 10 equal consecutive annual instalments, as long as the CRA gets security it accepts laws-lois.justice.gc.ca. The first instalment is due when the tax would normally be due, and each later one on the anniversary of that date.
The election is made on Form T2075, and only part of the balance can be deferred: the CRA describes the election as covering part of the tax on the deemed disposition of capital property and on a rights or things return canada.ca. Interest runs on the deferred amount at the prescribed rate in effect when the election is made, from the original due date
laws-lois.justice.gc.ca. Check the current quarter on our CRA prescribed interest rates page.
Sources
Does the beneficiary pay tax on inherited property?
No, not on the gain up to the date of death. That gain is taxed on the deceased's final return, and under 70(5)(b) the beneficiary's cost is the fair market value used there laws-lois.justice.gc.ca. Only growth after death is taxed, on the estate's T3 if the estate sells, or on the beneficiary's own return after distribution
canada.ca.
What if the surviving spouse is not a resident of Canada?
Then 70(6) does not apply, because it requires a spouse or spousal trust resident in Canada laws-lois.justice.gc.ca. The property is deemed sold at fair market value on the final return like any other bequest.
Do I report the principal residence if the whole gain is exempt?
Yes, unless it goes to the spouse. Even a fully exempt gain has to be designated on Schedule 3 and Form T1255, and the deceased's designation only covers the years up to death. If the home passes to a spouse or spousal trust, no designation is needed on the final return canada.ca. The formula is on our principal residence exemption page.
Is the RRIF taxed as a capital gain?
No. Unless it passes to the spouse under the CRA's conditions, the full fair market value of the RRIF just before death is income on the final return, reported from box 18 of the T4RIF, with no inclusion rate canada.ca. The legal representative can reduce that amount by any designated benefit paid to a financially dependent child or grandchild, who reports it instead
canada.ca. That is why a large RRIF often costs more tax at death than the deemed capital gains.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.