Deemed disposition on death

Heirs and executors of a business owner meet this rule because shares of a private company can be capital property. Nothing is actually sold. The Income Tax Act treats the owner as having disposed of the shares just before death, and the CRA says the resulting gain or loss is reported on the final return of the person who died.

How it works

Under paragraph 70(5)(a), the taxpayer is deemed to have disposed of each capital property for proceeds equal to its fair market value immediately before death. Under paragraph 70(5)(b), a person who acquires the property as a consequence of the death is deemed to acquire it at a cost equal to that value, subject to special rules for depreciable property in paragraphs 70(5)(c) and (d). The CRA says the result is reported on Schedule 3 of the final return.

Exceptions and what to ask

• Subsection 70(6) can defer the gain where property goes to a spouse or common-law partner, or to a qualifying spousal trust, if its conditions are met
• Ask whether the lifetime capital gains exemption can be claimed on death for the shares involved
• Ask the executor how the tax will be funded, since the deemed sale produces no cash