Can the lifetime capital gains exemption be claimed on death?

This page covers claiming the lifetime capital gains exemption on death for qualified small business corporation shares; farm and fishing property has its own deduction in section 110.6(2). The Income Tax Act treats death as a sale for tax purposes, and the capital gains deduction is available on a qualifying share disposition. The two can meet, but only if the shares pass the qualified small business corporation share tests and the deceased meets the deduction’s conditions.

Death is treated as a sale

Under section 70(5)(a), a taxpayer who dies is deemed to have disposed of each capital property immediately before death and received proceeds equal to its fair market value at that time. That is subject to exceptions elsewhere in section 70. For example, section 70(6) can apply instead, on its conditions, when property goes to a spouse or common-law partner resident in Canada, or to a spousal trust described in that section, and section 70(6.2) lets the legal representative elect to have section 70(5) apply instead.

Where the deduction comes in

Section 110.6(2.1) allows a deduction for an individual, other than a trust, who was resident in Canada throughout the year and disposed of a share that was a qualified small business corporation share at the time of disposition. Section 110.6(5) deems an individual resident throughout a year if resident at any time in it and throughout the year before or after. The amount cannot exceed the least of the figures the section sets. The Canada Revenue Agency’s capital gains deduction line covers dispositions of those shares. Whether a share qualifies is a separate test: see whether your shares qualify.

Who files and who checks

The CRA says the legal representative of someone who has died is responsible for the administration of the estate, and for making sure the taxes of the person who died are filed and any balance owing is paid before the estate is distributed. The claim sits in that representative’s hands, and an accountant can help. Asset sales are a different case, covered in selling assets instead of shares. Ask the accountant to test the shares on the date of death, and to check whether a spousal rollover or an election is in play.