Deemed Dispositions at Death

Geoff Currier & Evelyn Jacks

When a person dies in Canada there are hundreds of decisions which must be made. That’s why getting one’s affairs in order is so important, long before the event. In this second in our series on death and taxes in Canada, we’ll consider the highlights for discussions to be had with clients about reporting requirements at death of a taxpayer. 

The Backdrop: Taxable property must be reported at its fair market value (FMV) as at the date of death.  This is known as a deemed disposition.  It includes personal use property like the cottage or another home for which a Principal Residence Exemption (PRE) is elected. It also includes investments in non-registered accounts, crypto-assets, jewelry, artwork and even personal belongings valued at over $1000.

When it comes to reporting capital gains or losses, you’ll also need to refer to slips T3, T4PS, T5 and T5013T3, T4PS, T5, and T5013.

These transactions must be reported on Schedule 3 Capital Gains or Losses must be completed along with Form T1255, in the case of a PRE.

If the property is transferred to a spouse or common law partner, capital gains or losses are not factors – as the property can be rolled over at its cost base. In some cases, however, it may make sense to choose FMV, for example when the deceased left unused capital losses.

If some property is being transferred to someone other than the spouse or common-law partner, there could be a capital gain or a capital loss.  This can cause a significant financial hardship.  In some cases, assets will need to be sold to pay the taxes.  Having enough life insurance can help; so can knowledge of form T2075, Election To Defer Payment Of Income Tax, Under Subsection 159(5) Of The Income Tax Act By A Deceased Taxpayer's Legal Representative Or Trustee.

There may also be some planning opportunities with donations and some transactions to clear, such as reserves previously set up. 

Note that if the beneficiary sells the property inherited, a capital gain or loss (as applicable) must be reported on the T1 form on their return.

Cleaning up the Past: Clearing the books with CRA also includes taking care of any past returns which were not filed. This may generate further refunds, especially if important provisions like the Disability Tax Credit or medical expenses (which can be claimed in the best 24 month period prior to death), are missed.

The Bottom Line: Dealing with the death of a person in Canada is no simple matter for tax purposes. Your role is absolutely critical and can save the executor and the surviving beneficiaries a lot of money and time.

In fact, making certain the Final Return is completed properly is one of the most important functions you will perform. You will be doing your clients a great service at their time of bereavement. Spend some time, if you can, educating your clients and yourself in the complexities of the Final Return, the elective returns available and the GRE – Graduated Rate Estate.