This page is about income tax issues for houses in Canada
Many people own property as a ‘joint tenant with a right of survivorship’ together with their spouse.
When the first spouse dies, they effectively ‘drop off title’ and the surviving spouse is then the sole owner.
Learn more about the consequences of this joint ownership for estate law purposes here.
Deemed dispositions on death
In Canadian income tax law, a taxpayer is deemed to dispose of all of their assets on the date of death.
This means that a homeowner is deemed to have disposed of their ownership share of any house on the date that they die. This applies to jointly owned houses, as well as all other properties, whether jointly held or not.
Reporting the deemed disposition
Regardless of what the estate does with the property later, there is always a deemed disposition of the deceased’s ownership of the house on their death. This deemed disposition must be reported in the terminal return of the deceased (the T1 for the last period up to the date of death).
This deemed disposition of the house, even if it was jointly owned, must always be reported for income tax purposes on the deceased’s tax return.
Often, no income tax is payable by the deceased or their estate, but it is very important to make the right filings at the right time.
Calculating the proceeds of disposition & spousal rollovers
Unless there is a ‘roll-over’, the proceeds of disposition for each property on death are set at fair market value. Fair market value is not the ‘MCAP property tax’ value, or a sweetheart deal for a family member – it is the price that an informed third party would pay. It should be documented via a property opinion from a realtor or appraisal.
If the deceased owned a property jointly with their spouse (married or common law), it is possible to ‘roll-over’ the deceased’s ownership to their spouse. This option is available regardless of the type of property – it does not have to house, and it does not have to be a principal residence.
When the estate elects to roll-over a property to a surviving spouse, the spouse acquires the deceased’s share at the deceased’s adjusted cost base. As the deceased is deemed to have ‘sold’ for the same price as ‘they paid’, the deceased has no gain and there will be no income taxes payable by the deceased or their estate on the property rolled-over.
A roll-over must be disclosed and claimed on the terminal return of the deceased. A roll-over affects the ‘proceeds of disposition’ for the property disclosed on Schedule 3 of the T1 (again, setting the proceeds of disposition equal to the adjusted cost base, for no taxable gain).
Roll-overs with jointly held houses are extremely common, but of course they can be used to defer (not avoid) income taxes for other properties as well.
Claiming the principal residence exemption
If the property (house or cottage) qualifies as a principal residence of the deceased for some or all of the years it was owned, the principal residence exemption (the “PRE“) must be claimed by filing Form T1255 with the deceased’s terminal return even if a spousal roll-over is also claimed.
Every property that is jointly owned can be rolled over to a spouse. The PRE does not need to be used for every house, but it should be used for every house that the surviving spouse will claim the PRE for later.
When claiming the principal residence exemption in the deceased’s terminal return, it is very important to consider factors such as –
- whether the deceased or any related person has claimed the PRE before for prior years for this or any other property.
- Whether the deceased owns any other property (such as a cottage) (alone or jointly) that might qualify for the PRE.
Tax issues for the surviving spouse later
Title to the jointly owned property then belongs solely to the surviving spouse (after the death of the first-to-die joint owner).
If the surviving spouse later adds someone else to title as a joint owner, this is a disposition for tax purposes and must be reported. It can also have serious adverse consequences. Learn more here.
If the property was a PRE, the surviving owner must file Form 2019 if the use of the property changes (that is, it is no longer a principal residence).
Regardless of whether or not the property was a PRE, the surviving spouse must declare their disposition of the property (by sale, or via deemed disposition upon their death). So, if a property is rolled over from the first-to-die to the surviving spouse, the surviving spouse must declare gains equal to the difference between the adjusted cost base for the entire property and the proceeds of disposition for the entire property.
When there is no roll-over to a surviving spouse, the proceeds of disposition, even upon a deemed disposition on death, must be equal to the fair market value on date of death.
Any of these gains that are not shelted by the PRE are taxable as capital gains for the surviving spouse.
If the property was a principal residence of the surviving spouse, then the surviving spouse can claim the PRE (for some or all years they held ownership, as the facts warrant) when they dispose of the property (by sale, or deemed disposition on death). Claiming the PRE shelters some or all of the gains on the house from income taxes.
Tax filings for jointly owned houses are very frequently mismanaged. Get help from an experienced professional to ensure that they are done correctly.