KARAKTER Realty · Calgary Estate Sales

Capital gains and deemed disposition when selling a Calgary estate home

The deemed disposition rule

Section 70(5) of the Income Tax Act deems a deceased taxpayer to have sold all of their capital property immediately before death at fair market value. This applies even though no actual sale occurred. The deemed proceeds become the new "adjusted cost base" for the beneficiaries inheriting the asset.

For a Calgary home, deemed disposition triggers a capital gains calculation:

• Proceeds (deemed) = fair market value at date of death
• Less: adjusted cost base (typically original purchase price plus major capital improvements)
• Equals: capital gain

50% of the capital gain is included in the deceased's final tax return (for gains realized before June 25, 2024). The 2024 federal budget changed the inclusion rate to 2/3 for gains over $250,000 realized after that date — a complex change still being interpreted by accountants.

The Principal Residence Exemption shelters most home sales

The PRE eliminates capital gains on a property designated as principal residence for the years it was ordinarily inhabited by the deceased (or their family unit). For a Calgary home the deceased lived in throughout ownership, the PRE produces a full exemption — no capital gains tax owed.

The exemption is claimed on Schedule 3 and Form T2091 in the deceased's final return. The estate accountant files this.

When capital gains apply

Capital gains accrue on:

• Rental properties — never claimed as principal residence, full gain taxable.
• Secondary homes — Canmore cabin, vacation property; PRE can only cover one property per year per family unit.
• Mixed-use properties — homes with a self-contained rental suite or significant Airbnb use; proportional reduction in PRE.
• Properties moved out of — if the deceased moved into a care facility and rented out the home for years before death, those rental years lose the exemption (unless a section 45(2) election was filed).

How the tax is paid

The capital gain is reported in the deceased's final tax return (the "terminal return"), filed by the executor. Tax owing is a debt of the estate, paid from estate funds before residual distribution to beneficiaries. Specifically:

• Executor files the terminal return within 6 months of death (longer if approved).
• Tax owing must be paid; CRA charges interest from the due date.
• The home sale itself does not directly trigger tax — the deemed disposition at death did. The actual sale price becomes the cost base for the buyer.

Graduated Rate Estate (GRE) status

Most estates qualify as Graduated Rate Estates (GRE) for up to 36 months after death. GRE status allows:

• Graduated tax rates on estate income (rather than top marginal rate).
• Extension of PRE for up to 3 additional years if a qualifying family member continues to ordinarily inhabit the property.
• Capital loss carryback to offset gains in the deceased's terminal return.

The estate accountant should confirm GRE status at the outset of the estate administration.

Practical for Calgary executors

If the home was the deceased's primary residence throughout ownership: expect no capital gains liability. The estate accountant files the PRE designation.

If the home was a rental, secondary residence, or partially used for business: expect a capital gain. Engage the accountant before listing so the estimated tax is known and can be reserved from sale proceeds.

KARAKTER provides the closing data (sale price, completion date) the accountant needs to finalize the terminal return.

Related

See also: PRE at death, executor duties, and the deemed disposition glossary entry.

This page is for general information only and does not constitute legal or tax advice. Alberta estate and probate law is complex; always engage an estate lawyer and a licensed Alberta REALTOR® for your specific situation. KARAKTER Realty is licensed under RECA.