Deemed disposition of property

Here, we discuss the tax treatment of capital property the deceased owned at the date of death. We also deal with capital property in general, as well as the particular treatment of depreciable and farm property. We discuss only property acquired after December 31, 1971.

There are special rules for property that a deceased person owned before 1972. For details about these rules and for information about other property such as eligible capital property, resource property, or an inventory of land, contact us.

When a person dies, we consider that the person has disposed of all capital property right before death. We call this a deemed disposition.

Also, right before death, we consider that the person has received the deemed proceeds of disposition (we will refer to this as “deemed proceeds”). Even though there was not an actual sale, there can be a capital gain or (except for depreciable property or personal-use property) a capital loss.

For depreciable property, in addition to a capital gain, there can also be a recapture of capital cost allowance. Also, for depreciable property, instead of a capital loss there may be a terminal loss.

What is a capital gain?
When the proceeds or deemed proceeds of disposition of a capital property are more than its adjusted cost base, the result is a capital gain. In most cases, one half of the capital gain is the taxable capital gain.

Use Schedule 3, Capital Gains (or Losses), to calculate the taxable capital gain to report on the final return.

What is a capital gains deduction?
This is a deduction you can claim for the deceased person against eligible taxable capital gains from the disposition or deemed disposition of certain capital property.

You may be able to claim the capital gains deduction on taxable capital gains the deceased had in 2005 from:

• dispositions or deemed dispositions of qualified farm property;

• dispositions or deemed dispositions of qualified small business corporation shares; and

• a reserve brought into income from either of the above.

For more information, see the Capital Gains guide.

What is a capital loss?
When the proceeds or deemed proceeds of disposition of a capital property are less than its adjusted cost base, the result is a capital loss. One half of the capital loss is the allowable capital loss. You cannot have a capital loss on the disposition of depreciable property.

For more information on claiming a capital loss, see Net capital losses in the year of death.

Recaptures and terminal losses
For depreciable property, when the proceeds or deemed proceeds of disposition are more than the undepreciated capital cost, you will usually have a recapture of capital cost allowance. Include the recapture in income on the deceased’s final return.

For depreciable property, when the proceeds or deemed proceeds of disposition are less than the undepreciated capital cost, the result is a terminal loss. Deduct the terminal loss on the deceased’s final return.

For more information about a recapture of capital cost allowance or a terminal loss, see IT478, Capital Cost Allowance – Recapture and Terminal Loss.

Forms and publications

• Preparing Returns for Deceased Persons guide (T4011)
• Capital gains guide (T4037)
• Schedule 3, Capital Gains (or Losses)
• IT478, Capital Cost Allowance – Recapture and Terminal Loss