Deemed Disposition in Canada 2025: How It Works at Death

Deemed disposition is the mechanism Canada uses instead of an estate tax. When you die, the Income Tax Act treats you as having sold all your capital property at fair market value immediately before death. Any accrued capital gains are triggered and taxed on your final (terminal) tax return — even though nothing was actually sold.

What Is Deemed Disposition?

Under Section 70(5) of the Income Tax Act, a taxpayer is deemed to have disposed of all capital property immediately before death for proceeds equal to fair market value (FMV). The difference between FMV and the adjusted cost base (ACB) is a capital gain (or loss) reported on the terminal return.

This applies to:

Non-registered investment accounts (stocks, bonds, mutual funds, ETFs)
Rental properties and vacation properties
Shares of private corporations
Land and other real property (excluding principal residence)
Collectibles, art, precious metals
Certain foreign property

It does NOT apply to (these have separate rules):

Principal residence (protected by the principal residence exemption)
RRSPs/RRIFs (treated as income, not capital gains)
TFSAs
Life insurance

How the Tax Is Calculated

Example: Cottage at Death
Purchase price (ACB): $150,000
Fair market value at death: $550,000
Capital gain: $400,000
Taxable capital gain (50% inclusion): $200,000
Tax owing (at ~50% marginal rate): ~$100,000

The estate must pay approximately $100,000 in capital gains tax on this cottage — even though it hasn't been sold.

Example: Investment Portfolio at Death
Portfolio ACB: $200,000
Portfolio FMV at death: $600,000
Capital gain: $400,000
Taxable capital gain (50% inclusion): $200,000
Tax owing (~50% marginal rate): ~$100,000

Capital Gains Inclusion Rate

For individuals, capital gains have historically been included at 50% — meaning only half the gain is taxable. The 2024 federal budget proposed increasing the inclusion rate to 2/3 for capital gains over $250,000 annually (for individuals). As of early 2025, this remains subject to legislative development. Consult a tax professional for the current rate.

The Spousal Rollover: The #1 Planning Tool

The most powerful tool to defer deemed disposition is the spousal rollover under Section 70(6). When capital property passes to a surviving spouse or common-law partner (either directly or through a spousal trust), deemed disposition occurs at the property's ACB — not FMV. This means:

No capital gains triggered at the first spouse's death
The surviving spouse inherits the original ACB
Tax is deferred until the surviving spouse sells the property or dies

The spousal rollover applies automatically unless the deceased's will or tax return specifically elects otherwise. It requires the property to actually pass to the spouse — either outright or to a qualifying spousal trust.

Planning note: The spousal rollover only defers tax — it doesn't eliminate it. When the surviving spouse eventually sells or dies, the capital gains will be triggered. However, deferral is valuable: the tax is paid later, potentially at lower rates, and the capital can continue to grow in the interim.

Principal Residence Exemption

Your principal residence is exempt from deemed disposition capital gains. If the home qualifies as your principal residence for every year you owned it, the entire gain is sheltered. Only one property per family unit can be designated as a principal residence per year.

Lifetime Capital Gains Exemption (LCGE)

Certain types of capital property qualify for the Lifetime Capital Gains Exemption:

Qualifying Small Business Corporation (QSBC) shares: ~$1.25M exemption (2024)
Qualified farm property / qualified fishing property: ~$1.25M exemption (2024)

This exemption can shelter substantial capital gains at death. Proper corporate structure and tax planning are required to ensure shares qualify for the LCGE.

Capital Losses at Death

If the deceased has capital losses on deemed disposition, these can offset capital gains on the terminal return. Any net capital losses that cannot be used can be carried back 3 years or, to a limited extent, treated as terminal losses.

Strategies to Minimize Deemed Disposition Tax

Strategy	How It Helps
Spousal rollover	Defers all capital gains to surviving spouse's death
Principal residence designation	Shelters home from capital gains entirely
LCGE planning for business owners	Shelters up to ~$1.25M in business share gains
Life insurance	Provides tax-free liquidity to pay capital gains tax
Charitable bequests	Donating appreciated property eliminates capital gains on donated portion
Estate freeze	Locks in current FMV for capital gains; future growth taxed in next generation
Gradual realization	Harvest capital gains during life to reduce terminal return exposure

Filing the Terminal Return

The executor files the deceased's terminal T1 return for the period from January 1 to date of death. Deemed disposition gains are reported on Schedule 3 (capital gains). The return is due April 30 of the year following death (or 6 months after death if death occurs after October 31).

Liquidity risk: If the estate holds illiquid assets (cottage, private company shares, rental property) with large accrued gains, the tax bill can be substantial with no obvious cash to pay it. Life insurance is the most common solution — it provides tax-free cash exactly when needed.

Simplify Your Financial Life — Start with Free Banking

Part of good estate planning is keeping your financial accounts simple. KOHO's no-fee account is easy to manage and easy to include in your estate plan. Use code 45ET55JSYA for a bonus.

Get KOHO Free — Use Code 45ET55JSYA