Taxes When Someone Dies in Canada: Returns and Property

Does Canada charge inheritance tax when I receive my parent's property?

Canada generally does not tax a beneficiary simply for receiving an inheritance. The deceased's final return can still include a gain from property treated as sold immediately before death, even when the family keeps it (CRA: amounts not reported as income; CRA: capital gains after death).

Receiving the house or rental does not, by itself, put its value on your T1 as income. Income the property earns after you own it, or a gain when you later sell it, is a separate tax matter. The executor must identify and pay or secure the deceased's and estate's tax obligations before distributing property (CRA: clearance certificate).

What is the deemed sale at death, and what goes on the final T1?

The deceased is generally treated as selling capital property for its fair market value immediately before death. The executor reports any resulting capital gain or permitted capital loss on Schedule 3 of the final T1, even if the property stays in the family (CRA: capital gains after death).

The gain is generally the date-of-death value minus the property's adjusted cost base, which includes purchase costs and capital improvements. For a rental, value the land and building separately. A rental building cannot produce a capital loss. Its deemed sale may add previously claimed depreciation back as income (recapture) or allow a deduction for undepreciated cost (terminal loss), calculated separately on Form T776. If the building has fallen in value while the land has risen, a rule may shift some land proceeds to the building and reduce both the land gain and terminal loss (Income Tax Act, section 13). Keep the purchase documents, improvement records, prior rental schedules and support for the date-of-death value (CRA: capital gains after death; CRA: selling a rental property).

The final T1 also includes income earned up to death, such as rent, pensions and interest, even when some of that income arrives later. Certain income can instead qualify for an optional T1 return; the choice needs a review of the income and dates (CRA: what returns to file; CRA: report income).

Is my parent's home tax-free at death, and must it be reported?

Some or all of the home's gain may be exempt if it qualifies as the deceased's principal residence. Unless the home transfers under the qualifying spouse or common-law partner rollover, the executor must report the deemed disposition on Schedule 3 and complete Form T1255 even when the exemption removes the whole gain (CRA: designate a principal residence).

The deceased's designation covers only the period up to death. A cottage, a rental period or a home partly used to earn income can change the exempt amount. For the calculation and reporting rules, see Principal residence exemption.

Who pays tax on an inherited rental: my parent, the estate or me?

The executor normally pays the parent's final T1 tax from estate assets. The estate pays tax on income it retains after death; a beneficiary reports income properly allocated to them and rent or gains after they receive the rental. Inheriting the property alone does not put the parent's gain on the beneficiary's T1 (CRA: represent someone who died; CRA: report income).

If a graduated rate estate has a net capital loss or rental terminal loss in its first three tax years, the executor can elect to transfer that loss to the parent's final T1. This can matter when the estate sells for less than the death-date value. File the election with the loss-year T3 and amend the final T1 on Form T1-ADJ by that T3's filing deadline; a personal-use home's loss may be denied (CRA: net capital losses; Income Tax Act, section 164). For a Canadian home or rental sold within 365 days of the estate acquiring it, check the flipped-property rules before treating a gain or loss as capital (CRA: T3 Trust Guide).

The estate must plan for final T1 tax even if the rental is given to an heir rather than sold. The executor can elect on Form T2075 to pay the extra tax from the deemed sale at death or rights or things in up to 10 equal annual instalments. The CRA must accept security; interest accrues, and the signed form and first instalment are due by the final T1's payment deadline (Income Tax Act, section 159; Income Tax Regulations, section 1001; CRA: Form T2075). For ordinary rental expense reporting, see Rental income. For a later sale by the heir, see Selling a rental property.

Can property pass to a surviving spouse without an immediate gain?

Capital property can generally transfer to a surviving spouse or common-law partner resident in Canada, or to a qualifying spousal trust, at the deceased's tax cost instead of date-of-death value. The property must become irrevocably the spouse's or trust's within 36 months after death. The gain is then deferred until a later disposition (CRA: capital gains after death).

Non-home property transferred under this rollover still goes on Schedule 3. Land uses proceeds equal to its adjusted cost base. A rental building uses the lower of its original cost and undepreciated cost, so past depreciation is not added back on the final T1. The spouse takes over the original cost and past depreciation (Income Tax Act, section 70).

The executor can elect out of this rollover for a particular property on the final return, causing a date-of-death value disposition. That decision changes both the tax due now and the recipient's cost. If the transfer does not qualify or the required timing is missed without an extension, the final return must report the gain. A home transferred under the qualifying rollover does not need a principal residence designation or deemed-disposition entry on the final return; keep its residence history for the spouse's later sale (CRA: capital gains after death).

When are the final T1 and earlier missing returns due?

The date of death sets the final T1's filing and payment deadline. Earlier returns already overdue keep their original deadlines; an unfiled prior-year return that was not yet due when the person died is generally due six months after death (CRA: filing and payment due dates).

The business filing extension excludes businesses whose expenditures were mainly tax shelter investments. The Act says a business carried on in the year qualifies; the CRA's summary says operating on the date of death. Confirm the filing date if the business ended before death (Income Tax Act, section 150; CRA: filing and payment due dates). For a prior-year return of someone who died from May through June before their business filing deadline, the Act's April 30 payment date differs from the CRA page's six-month summary (Income Tax Act, section 248; CRA: filing and payment due dates). Payment is not extended by a later filing date. The ordinary late-filing penalty is 5% of unpaid tax plus 1% for each full month late, up to 12 months; interest also accrues (CRA: filing and payment due dates).

When does the estate need a T3, and who reports rent after death?

An estate that keeps a rental and earns rent after death generally needs to account for that income on a T3. A T3 is conditional: an estate distributed promptly with no post-death income may not need one. The parent's final T1 never includes rent the estate earns after death (CRA: what returns to file; CRA: report income).

If the estate retains the rental, separate receipts and expenses at the date of death. The T3 reports estate rental income using Form T776; a resident beneficiary allocated net rent generally receives a T3 slip showing it in box 26, or notice of the income if no slip is required (CRA: T3 Trust Guide; CRA: T3 slip). After the rental is distributed and the beneficiary earns rent directly, the beneficiary reports it on their own T1. A required T3 and its payment are generally due 90 days after the estate's year-end. A graduated rate estate can choose its first year-end up to one year after death, with a final year-end on distribution; other estates use December 31 (CRA: filing and payment due dates).

What cost do I use if I later sell inherited property?

For property inherited outside the spouse rollover, the beneficiary's starting tax cost is generally the deemed proceeds used on the deceased's final T1, usually its date-of-death fair market value. For depreciation, an inherited rental building worth less than its original cost can keep the parent's original capital cost, with the difference treated as depreciation already claimed. A later sale can then cause recapture (Income Tax Act, section 70). The beneficiary reports a later sale on their own T1, accounting for subsequent capital costs and sale expenses (CRA: capital gains after death).

Keep the final T1's property schedule and valuation with your purchase and improvement records. A spouse who receives property under the tax-deferred rollover generally takes the deceased's tax cost instead; their later gain may include growth from before death (CRA: capital gains after death).

When should the executor request a CRA clearance certificate?

Request CRA clearance after filing all required returns, receiving the assessments, and paying or securing the tax, but before distributing the estate's remaining assets. Do not send the request with the returns. The Act requires a certificate before distribution; an executor who distributes without one is personally liable for unpaid tax up to the value distributed (Income Tax Act, section 159; CRA: apply for a clearance certificate).

Tell the CRA who the legal representative is, then use Form TX19. If the deceased or estate had a GST/HST account, the CRA also calls for Form GST352. The request needs the will or appointment document, an asset list, valuations and details of past and proposed distributions. A certificate confirms the amounts covered were paid or secured as of issue; it is a safeguard for the executor, not a substitute for filing the T1 or T3 (CRA: apply for a clearance certificate).

What changes if the deceased or estate was in Quebec?

A Quebec resident's liquidator must also file a Quebec death-year return (TP-1-V) when the deceased owned a home or rental, since a deemed disposition of capital property is a filing condition. File any earlier required returns that were missed (Revenu Québec: filing obligations).

If the Quebec succession earns rent after death, the liquidator may also need to file a separate Quebec Trust Income Tax Return (TP-646-V). Get a trust identification number before filing a required return. It is generally due 90 days after the succession's tax year-end (Revenu Québec: types of returns; Revenu Québec: filing deadlines).

Revenu Québec requires a separate certificate before paying the deceased's debts or distributing property or post-death income. Request it on Form MR-14.A-V, or online if you are the sole liquidator. Urgent death or property expenses can be paid first, up to $12,000. Specify the distribution planned: the certificate may authorize only part of it. Coordinate with CRA clearance (Revenu Québec: distribution certificate).

Example

Illustrative amounts in Canadian dollars. A parent bought a rental for $300,000: $100,000 for land and $200,000 for the building. At death, the land is worth $150,000 and the building $350,000. Assume no selling costs, capital improvements, depreciation claims or spouse rollover. The executor reports a $50,000 land gain and a $150,000 building gain, or $200,000 in total, on the parent's final T1, even though the child inherits the rental. If the estate earns $12,000 of net rent before transferring it, that income belongs in the estate period and requires a T3 whether retained or allocated to the child. The child's starting cost is generally $500,000. A later sale for $550,000, allocated $165,000 to land and $385,000 to building, could create a further $50,000 gain before selling costs and any later cost adjustments. These gains are separate; no tax amount is calculated here.

Different for you?

• Two homes, a cottage, or years of rental use: The exempt part of a home gain needs a principal residence review.
• Multiple rentals, disputed date-of-death values, a spouse rollover election, or an estate that keeps earning income: Gather the will, death certificate, prior returns, purchase and improvement records, valuations, rental records and distribution plan for an individual tax review.
• Missing returns from before death: Check which years were required and their original due dates in Catching up on unfiled returns.
• Private-company shares: Their death and estate tax treatment belongs in When a corporation owner dies.
• Property outside Canada: See Property outside Canada for non-US property, or Settling an estate across the border for US assets or a US-resident executor or heir.