Capital Gains When Someone Dies in Canada: 2026 Estate Tax Guide

When a Canadian resident dies in 2026, the Income Tax Act treats them as having sold every capital property at fair market value immediately before death. The resulting capital gain is reported on the deceased’s final T1 return, with the currently enacted one-half inclusion rate. The estate inherits the property at that fair market value, so the same gain is not taxed twice.

What happens tax-wise when someone dies

The Canada Revenue Agency calls this the deemed disposition rule under subsection 70(5) of the Income Tax Act. It is automatic, and it sets up two distinct tax periods:

• Up to and including the date of death — income and the deemed disposition gains are reported on the deceased’s final T1 (terminal) return.
• After the date of death — income earned on estate assets, and any gain or loss when the estate later sells those assets, is reported on a T3 Trust Income Tax and Information Return.

This page focuses on the capital-gains side of the final return. For the broader estate workflow, see the estate journey.

Deemed disposition explained

For each capital property, the deceased is deemed to have disposed of it for proceeds equal to fair market value on the date of death, and the estate is deemed to have acquired it at the same value. The capital gain or loss is reported on Schedule 3 of the final return, and the taxable portion flows to line 12700 of the T1. CRA’s guidance on capital gains for deceased persons is here.

Capital gains inclusion rate for 2026

The currently enacted inclusion rate in 2026 is one-half. The federal government’s June 2024 proposal to raise the rate to two-thirds on individual gains above $250,000 and on all corporate and trust gains was deferred to January 1, 2026, and has not been enacted. CRA confirmed it is administering the one-half rate. All gains on the final return are included at 50% until legislation changes that.

For the rule itself, see the capital gains inclusion rate glossary entry, and the deeper explainer on how the rate applies to deceased estates in 2026.

Principal residence exemption

If the deceased owned a home that qualified as their principal residence for every year of ownership, the deemed-disposition gain is fully exempt. The legal representative claims the exemption by filing Form T1255 with the final return, designating the years of ownership. Partial designations (for example, a cottage shared with a primary home) follow the formula in CRA Guide T4037. A deeper walk-through is in principal residence exemption after death.

Inherited property and adjusted cost base

Heirs do not inherit the deceased’s original cost. They inherit the property at the fair market value used in the deemed disposition. That FMV becomes the heir’s new adjusted cost base. Any later sale by the heir produces a gain or loss measured from that stepped-up base, not from what the deceased originally paid.

For real estate specifically, see capital gains tax on an inherited house in Canada.

Final return vs estate (T3) return

The final T1 covers everything up to the date of death, including the deemed-disposition gains. Anything that happens after death — interest paid on a GIC, a stock sold by the executor for more than the FMV at death, rental income on a property held during probate — is reported by the estate on a T3 return. The estate is taxed at graduated rates for up to 36 months if it qualifies as a Graduated Rate Estate, then at the top rate. See GRE vs ordinary trust on capital gains.

The final T1 deadline is April 30 of the year following death, or six months after the date of death, whichever is later (June 15 if the deceased had self-employment income). The first T3 is due 90 days after the trust’s first year-end.

What the executor needs to do

1. Get a date-of-death valuation for every capital property. For securities, use the trading day before death; for real estate, an appraisal.
2. Identify each spousal-rollover candidate. Decide property-by-property whether to accept the automatic rollover or elect out on the final return to use the deceased’s losses or lifetime capital gains exemption.
3. File the deceased’s final T1 with Schedule 3 (capital gains) and Form T1255 if claiming the principal residence exemption.
4. Apply for a Clearance Certificate (Form TX19) before distributing estate assets so the executor is not personally liable for unpaid tax.
5. Open the estate’s T3 trust filing for any post-death income or further dispositions.

Worked examples

Example 1 — Non-registered ETFs. The deceased held an index ETF with adjusted cost base $40,000 and date-of-death FMV $90,000. The deemed disposition produces a $50,000 capital gain on Schedule 3. At the 2026 one-half inclusion rate, $25,000 is taxable on line 12700 of the final T1.

Example 2 — Spousal rollover with election. The same ETF is left to a Canadian-resident spouse. The default rollover deems proceeds equal to the $40,000 ACB, so no gain on the final return; the spouse’s ACB becomes $40,000. If the deceased had $30,000 of unused capital losses, the executor may elect out of the rollover for that property to trigger the $50,000 gain, absorb the losses, and step the spouse’s ACB up to $90,000.

Example 3 — Principal residence plus cottage. A house with $200,000 of accrued gain and a cottage with $150,000 of accrued gain are both deemed sold. The executor designates the house as principal residence for every year, fully exempting the $200,000 gain via Form T1255. The cottage gain remains taxable: $75,000 included on line 12700 at the one-half rate.

Common mistakes

• Skipping the date-of-death valuation. Without a contemporaneous appraisal, CRA can challenge the deemed-disposition FMV and reassess the final return.
• Not filing Form T1255. The principal residence exemption is not automatic at death; it must be designated on the final return.
• Distributing assets before the Clearance Certificate. The executor remains personally liable for any unpaid tax on the deceased’s or estate’s returns until the certificate issues.
• Treating the estate as an extension of the deceased. Post-death income belongs on a T3, not on the final T1.
• Assuming the inclusion rate jumped to two-thirds. The proposed 2024 increase was deferred and is not enacted; one-half still applies in 2026.

Related estate capital gains guides

This page is the master executor guide. Once the basics are clear, these focused pages go deeper on a specific decision:

• Capital gains inclusion rate for deceased estates in 2026 — the rate, the deferred 2024 proposal, and what CRA is actually administering.
• Capital gains tax on an inherited house in Canada — adjusted cost base after death, sale by the estate vs. sale by the heir, and partial principal-residence designations.
• Principal residence exemption after death — Form T1255, the years-of-ownership formula, and the per-couple-per-year rule.
• Graduated Rate Estate vs ordinary trust on capital gains — the 36-month GRE window, why it matters for capital gains realized after death, and when to close the estate.