Taxable capital gains on property, investments, and belongings

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, 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.

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.

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

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.

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.

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.

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.

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.

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.

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.

Refer to Designate a principal residence.

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.

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.

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)

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.