Capital Gains and What You Actually Need to Know

Capital Gains and What You Actually Need to Know

I had a conversation with a client recently, one of those that starts out casual but lands squarely in the deep end of tax law. In her 90's, his mom isn’t as mobile as she used to be, and the family was talking about what happens to her house when she’s gone. The practicalities, the emotions, the next chapter,  all of it. But inevitably, the conversation turned to tax.

“So how do we avoid the capital gains tax when I inherit the house?”

Fair question. But it also reveals just how much confusion exists around this topic. Most people think they know how capital gains and inheritance taxes work, and then they’re surprised when reality looks very different.

Let’s talk about what actually happens in Canada, with references to government and professional resources so you know this isn’t just “something I heard.”

There Is No Inheritance Tax in Canada

First things first: Canada does not have an inheritance tax the way some U.S. states do. You don’t pay tax just because someone left you property or money. In fact, money or assets received through inheritance aren’t considered taxable income by the CRA. (Fidelity Investments Canada)

This is hugely important because people often assume a big bill is waiting just because a property changes hands at death. That’s simply not how Canadian tax law works.

What Does Happen: Deemed Disposition

When someone dies, the CRA treats most capital property, including real estate, as if it were sold at fair market value just before death. This is called a deemed disposition. (Canada)

No physical sale occurred. No buyer walked through the door. But for tax purposes, it’s treated as though it did.

If the property had increased in value since it was bought, that “deemed sale” can trigger a capital gain. The estate must report this on the deceased person’s final tax return. (Canada)

This is the moment where most people assume you personally owe tax when you inherit the property,  but that’s not the case. The estate handles any tax triggered by the deemed disposition.

Principal Residence Exemption: Your Best Friend

Here’s the crucial point: if the property was the deceased person’s principal residence, most or all of the capital gain can be sheltered from tax under the Principal Residence Exemption. (Canada)

What that means in practice:

  • The home is treated as if it was sold at fair market value at death.
  • A final tax return is filed for the deceased.
  • The Principal Residence Exemption is claimed.
  • The capital gain is eliminated.
  • The estate pays no capital gains tax on that property.

Shares of this exemption apply whether it was a detached home, condo, or other qualifying housing unit. (Canada)

If the home wasn’t a principal residence,  say it was a rental property or secondary cottage,  then the exemption doesn’t apply and a taxable capital gain would be reported. (Canada)

You Don’t Pay Tax Just Because You Inherited It

This is probably the biggest myth out there: inheriting a house means you pay tax.

Not true.

Canada has no inheritance tax. Money or assets you receive through inheritance aren’t considered taxable income. (Fidelity Investments Canada)

In most cases:

  • You do not report the inheritance as income. (H&R Block Canada)
  • You do not personally pay capital gains tax at the moment you inherit. (srjca.com)
  • Tax implications only arise if and when you sell the property later,  and even then only on gains above the value at the time you inherited it. (srjca.com)

 

How the Tax Gets Calculated (if it Applies)

Remember: the tax exists at death if the property was not the principal residence. The capital gain is the difference between the original purchase price (adjusted cost base) and the fair market value at death. (Canada)

Canada currently taxes capital gains by including 50% of the gain in income. This “inclusion rate” is still the rule administered by the CRA for now. If that changes in the future, that would require legislative implementation. (Canada)

So if someone bought a property for $700,000 and it’s worth $1,500,000 at death:

  • Capital gain = $800,000
  • Taxable portion = 50% × $800,000 = $400,000
  • That $400,000 gets included in income on the deceased’s final return and taxed at marginal rates. (Canada)

Importantly, the estate pays this. You don’t receive a personal bill for it.

Adjusted Cost Base: Your Starting Point When You Inherit

When you inherit the property, your Adjusted Cost Base (ACB) becomes the fair-market value at the date of death. (srjca.com)

That matters because if you later sell the house, capital gains are calculated based on:

Sale price − ACB (value when inherited)

Not what your parent paid decades ago.

So using our earlier example, if you inherit at $1.5M and sell years later for $1.6M, your taxable gain is based on that $100,000 difference,  not $800,000.

Probate and Estate Administration Tax (Ontario)

Even in the clearest inheritance scenarios, there is one cost many people forget: Estate Administration Tax (often called probate tax) in Ontario. (Ontario)

In Ontario:

  • The first $50,000 of estate value is exempt. (Ontario)
  • For the portion over $50,000, the tax is typically $15 per $1,000 of value. (Ontario)

That means on a $1.5M estate, the tax is paid on $1,450,000 minus the exempt amount, and can be a significant administrative cost. (Ontario)

This is not income tax or capital gains tax, it’s a provincial administration fee that the estate pays before assets are distributed.

Common Misunderstandings (Cleared Up)

When I talk to people about this, there are a few things I hear all the time that simply aren’t true:

Myth: “I’ll owe tax just because I inherited the property.”
Reality: There’s no inheritance tax in Canada, and you don’t report inheritance as income. (Fidelity Investments Canada)

Myth: “CRA taxes the benefit of inheriting a house.”
Reality: Tax arises only from the deemed disposition at death, and only on gains. (Canada)

Myth: “If the house is worth a lot, I automatically owe a tax penalty.”
Reality: If it was your parent’s principal residence, the gain can be fully exempt. (Canada)

Myth: “I pay tax as soon as I inherit the house.”
Reality: You don’t pay capital gains until you sell — and only on gains above the stepped-up cost base. (srjca.com)

Why This Matters

This topic isn’t abstract. It affects families, often when emotions are high and there are other pressures to manage. Knowing what actually happens, and what doesn’t, gives you a huge advantage in planning and peace of mind.

The estate settles any tax obligation before you receive the property. Once it’s in your hands, you only owe tax if and when you sell, and even then only on post-inheritance gains.

Let’s Be Practical for Your Situation

In your case, inheriting a mortgage-free house that’s been your mom’s principal residence for 40+ years, the tax outcome in Canada is as clean as it gets:

If you later sell the property or rent it out, any gain is calculated from the value at inheritance forward, not from what your mom paid decades ago. (srjca.com)

Final Thought

Capital gains and inherited property are often misunderstood, but the fundamentals are straightforward when you look at the rules instead of the rumours. Make sure you get accurate information early, talk with legal and tax professionals, and don’t let myths drive your decisions.

If you’d like a short summary table, social excerpts, or a checklist for your clients/readers, just let me know, I can build those next.

 

Feb 09, 2026