Deemed Disposition on Death (ITA s.70(5)) — aka “Canada Pretends You Sold Everything at 11:59 PM”

“At death, tax law doesn’t say goodbye. It says: cool, now let’s settle up.”

We’ve already built your ethical backbone (remember: consent and confidentiality are not optional), and we sent you into the wild with a squad of pros (lawyer, CPA, CFP, trust officer). Now it’s time to meet the moment where all those roles crowd around one crucial fiction: the deemed disposition on death.

Here’s the big idea: under the Income Tax Act (ITA) s.70(5), when a Canadian resident dies, they are treated as if they sold almost all their property for fair market value (FMV) immediately before death. No, there’s no buyer. Yes, CRA still wants the tax. This is the engine of post-mortem tax planning in Canada.

Why s.70(5) Exists (and Why You Should Care)

Death stops many things. Capital gains aren’t one of them.
Without s.70(5), accrued gains could escape taxation. So the Act says: we’ll tax the built-in gains now — right before death — unless a rollover applies.
This rule drives everything from drafting choices in wills to who your CPA calls first, and it’s where ethics (capacity, conflicts) collide with math.

TL;DR: s.70(5) creates a final capital gains event by pretending you sold at FMV the second before you died.

The Core Rule (And Its Friendly Frenemies)

The Core: s.70(5)

A deceased taxpayer is deemed to have disposed of all capital property at FMV immediately before death.
The taxation year ends on death (ITA s.249(4)). A “terminal return” is filed to report the gains.
Inclusion rate: As of our knowledge cutoff (2024-10), the capital gains inclusion rate is 50%. Budget proposals may change this. Always verify current rules before advising.

Taxable capital gain ≈ (FMV − Adjusted Cost Base − Selling costs) × inclusion rate

Depreciable property twist: FMV disposition can cause recapture of CCA (s.13) — that’s ordinary income, not a capital gain. Terminal losses can arise if FMV < UCC.

The Big Exceptions (aka “Rollover Royalty”)

Spouse/Common-Law Partner Rollover (s.70(6))
- Property can transfer at deceased’s tax cost to a spouse or to a qualifying spousal/common-law partner trust. That defers the tax until the spouse disposes of the property or dies.
- Conditions matter: spouse must get the property or the trust must be exclusively for the spouse during lifetime; property must vest indefeasibly within the prescribed period (generally 36 months, extensions possible with CRA).
- The executor can elect out of the rollover to trigger gains deliberately (e.g., to use losses or the Lifetime Capital Gains Exemption).
Alter ego/joint partner trusts (pre-death planning under s.73): roll into the trust during life; the deemed disposition happens on the settlor’s or survivor’s death, not on transfer, which can simplify probate/privacy and timing.

What Actually Gets Taxed? A Quick Map

Asset Type	What s.70(5) Does	Rollover Potential	Special Notes
Non-registered investments (stocks, funds)	Deemed FMV sale; capital gain/loss	Spousal rollover available	Consider superficial loss rules pre-death; year-end at death
Real estate (not principal residence)	Deemed FMV sale; capital gain	Spousal rollover available	Principal residence exemption may shelter some/all gain
Principal residence	Deemed sale; apply PRE	Spousal rollover possible	Designation under s.40(2)(b); executor must pick years wisely
Depreciable rental/building	Deemed sale; recapture/terminal loss + capital gain on land	Spousal rollover available	Recapture is ordinary income; land is capital property
Private company shares	Deemed FMV sale; capital gain	Spousal rollover available	Watch post-mortem double tax; consider s.164(6) planning/pipeline
RRSP/RRIF	Not s.70(5) capital property; separate inclusion rules	Rollover to spouse/financially dependent child possible	RRSP/RRIF inclusion under s.146 rules; coordinate with estate cash needs

Heads up: Not everything is capital property. Some items (RRSP/RRIF, accrued employment income, “rights or things” under s.70(2)) follow separate rules and sometimes allow extra returns to reduce tax hit.

Mini-Example (Numbers Without Tears)

Imagine Priya dies holding:

Non-registered ETF: ACB $200,000; FMV $350,000
Cottage (not principal residence): ACB $300,000; FMV $700,000
Rental building: UCC $180,000; ACB $250,000; FMV (building) $300,000; Land ACB $100,000; FMV $200,000
PrivateCo shares: ACB $1; FMV $1,000,000 (QSBC shares)

Case A: No rollover (assets go to adult children directly).

ETF gain: $150,000 → taxable at 50% inclusion
Cottage gain: $400,000 → taxable at 50% inclusion (unless PRE applies for some years)
Rental: Building FMV > UCC ⇒ CCA recapture $120,000 (ordinary income) plus capital gain on building to the extent FMV exceeds original cost; land gain $100,000 at 50% inclusion
PrivateCo shares: $999,999 gain → taxable at 50% inclusion. Potential use of Lifetime Capital Gains Exemption (LCGE) for Qualified Small Business Corporation (QSBC) shares if criteria met, potentially sheltering a big chunk.

Case B: Spousal rollover (all to spouse or spousal trust).

Gains are deferred: deemed proceeds equal ACB/UCC (no immediate tax). Executor could elect out selectively — for example, roll over most assets but crystallize LCGE on QSBC shares to use exemption room.

Planning aura: Choosing between Case A and B isn’t vibes-based. It’s math + beneficiaries’ needs + the will’s terms + ethics (hello conflicts between spouse and children from a prior relationship).

Interfaces With Earlier Foundations (Ethics, Roles, Privacy)

Ethics/conflicts: A spousal rollover may defer tax but reduce what goes to non-spousal heirs now; electing out can increase tax today but equalize inheritances. The advisor must identify conflicts and ensure the executor’s duty to the estate, not to individual beneficiaries, remains crystal clear.
Roles: The lawyer drafts the will/trust terms enabling rollovers; the CPA models tax outcomes, manages elections, and coordinates special returns; the CFP/trust officer navigates cash flow and investment impacts for survivors. Team sport. No solo heroics.
Privacy/confidentiality: Executors need authority and documentation to access CRA and financial info. Share only what’s necessary with beneficiaries; taxes require details, not a full gossip dump.

Pro Tips and Traps (a.k.a. “Don’t Let s.70(5) Cook You”)

Principal Residence Exemption (PRE) still works at death.
- Designation can wipe or reduce gains. Executors must pick years carefully, especially if multiple properties were owned over time.
Timing and elections are everything.
- Spousal rollover is the default when conditions are met — unless the executor elects out. Partial elections are a thing. Read the will. Then read it again.
Multiple returns can soften the hit.
- Terminal return (T1), plus optional returns (e.g., “rights or things” under s.70(2)) may split income across returns, accessing more personal credits and lower brackets.
Capital losses at death have superpowers.
- Special rules can allow net capital losses in the year of death (and sometimes the prior year) to offset other income. Coordination between CPA and executor = chef’s kiss.
Private company shares need post-mortem choreography.
- Without planning, you can get double tax: capital gain on death and dividend tax on extracting corporate assets later. Consider s.164(6) loss carryback strategies or “pipeline” planning. Bring in tax counsel early.
Liquidity, liquidity, liquidity.
- Deemed tax with no cash is a plot twist no one enjoys. Insurance, corporate redemptions, and staged dispositions can keep the estate from a fire sale.
Residency and non-resident assets.
- The above assumes Canadian residence at death. Non-residents face different scoping (taxable Canadian property). Cross-border? Call a specialist yesterday.

A Quick Workflow You Can Steal

1. Confirm authority: executor/administrator appointed; gather will, death certificate.
2. Inventory assets: ACB, UCC, FMV at death; identify registered vs non-registered.
3. Identify rollover eligibility: spouse/CLP, spousal trust terms, vesting timelines.
4. Model scenarios: full rollover vs electing out; incorporate PRE, LCGE, CCA recapture.
5. Check special returns: rights or things; carrybacks; capital loss optimization.
6. Plan liquidity: insurance proceeds, corporate redemptions, staged sales.
7. File on time: terminal T1, optional returns, trust T3 if estate; consider GRE status.
8. Keep it ethical: document conflicts, obtain consents, disclose appropriately.
9. Seek CRA clearance certificate before full distribution.

Common Misunderstandings (Let’s Un-confuse This)

“Everything is taxed as capital gains at death.” Nope. Some items are income (CCA recapture, RRSP/RRIF). Some roll tax-free to spouse/trust.
“Spousal rollover is automatic no matter what.” Conditions matter. Wording in the will and vesting within timelines are crucial. Also, the executor may strategically elect out.
“Principal residence always wipes the gain.” Only for designated years and within the formula. Multiple properties complicate things fast.
“We’ll figure out private company shares later.” Later is where double tax lives. Plan now.

Key Takeaways

ITA s.70(5) deems a sale at FMV immediately before death, triggering gains (and recapture) unless a rollover applies.
The spousal/common-law partner rollover (s.70(6)) is your main deferral tool; you can elect out selectively.
PRE, LCGE, capital loss rules, and optional returns can dramatically change the tax bill.
Post-mortem planning for private corporations is its own mini-boss — bring experts.
Ethics and privacy from our earlier module are not decorative; they are the guardrails while you drive this very real tax bus.

Final thought: s.70(5) turns death into a deadline. The best estates feel planned, not panicked.

Now take a breath, call your CPA bestie, and remember: the law pretends there’s a sale; your job is to make sure no one has to sell the house because you forgot to check a box.

Core Tax Concepts at Death and for Estates

Content