Revenue Canada Taxation Head Office
XXX
P. K. Tang (613) 957-2103
May 22, 1987
Dear XXX
This is in reply to your letter of April 5, 1987, concerning taxation of properties received as an inheritance.
You stated that money inherited by a taxpayer is not subject to income tax while a home/business inherited by a taxpayer will be subject to capital gains taxation when it is subsequently disposed of. You also stated that if a farmer dies and leaves his farm to his son any gain from the sale of the farm by his son is not subject to tax. However, if the farmer sells his farm and leaves the money to his son upon his death there are no tax consequences. You wonder why a person inheriting a family residence/business should be "singled out" for tax reasons.
For purposes of the Income Tax Act when an individual dies he is deemed to have disposed, immediately before his death, of all properties owned by him. Depending on the relationship of the inheritor to the deceased and on the tapes of properties involved, the Income Tax Act provides rules to determine the proceeds of disposition to the deceased and the costs to the person who inherits those properties.
The general rule is that the deceased is deemed to have disposed of all of his property immediately before his death and to have received proceeds of disposition therefor, equal to the fair market value of the property at that time and the person who inherits is deemed to have acquired it at a cost equal to that amount. The deceased will realize a capital gain if the deemed proceeds of disposition exceed his adjusted cost base of the property. To the extent that the capital gain exceeds the lifetime capital gains exemption of the deceased, the gain will be taxable to the deceased. If the deceased had actually sold the property just before he died, the tax treatment would be the same.
There are special rules which permit the deferral of tax on the transfer of property on death in certain circumstances. One of these circumstances is where property is bequeathed to the spouse of the deceased.
In this case, the deceased is deemed to have received proceeds equal to his "tax cost" on the disposition of the property so that he has no capital gain. The spouse is deemed to have acquired the property for the same amount. Since the deceased would have no capital gain, no tax would be payable at that time as a result of the bequest. Similar provisions permit a deceased farmer to leave his farm to his child without realizing a capital gain and other provisions permit a deceased person to reduce the capital gain he would otherwise have realized on the shares of his small business corporation by up to $200,000 if he leaves the shares to his child.
When a deceased person leaves money to his heirs, he would not normally have a capital gain on its disposition since his proceeds of disposition and his cost would both equal the face value of the money. If, however, the money was not Canadian money or had a value that was different from its face value, such as a coin collection, the deceased could have a capital gain or a capital loss upon its deemed disposition. Further, if the property was the principal residence of the deceased during the period that he owned it, any gain on its disposition would be exempt.
Regardless of whether the general rule or one of the special rules applies, the person who inherits the property is not subject to tax as a result of the inheritance. Only when that person subsequently disposes of the property and realizes a capital gain, will that person be subject to tax on the capital gain and then only on that part of the capital gain that exceeds his lifetime capital gains exemption.
One advantage of the special rules which defer the tax is that the property of the deceased can be passed to the spouse or child, as the case may be, whereas it might otherwise have to be sold to pay taxes if the special rules did not exist.
These comments are a very general outline of the applicable provisions of the Income Tax Act and their application in any particular circumstance will depend on the facts of the specific circumstance. To assist you further we are enclosing copies of Interpretation Bulletins dealing with transfer of properties on the death of taxpayers under different circumstances. If you require further assistance you may wish to contact Mr. Peter Skinner of the Enquiries and Office Examination Section at the Vancouver District Taxation Office. His telephone number is (604) 666-3613.
Yours truly,
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch