When a Canadian resident passes away, the Canada Revenue Agency (CRA) triggers a deemed disposition under Section 70(5) of the Income Tax Act.  

This rule dictates that a deceased individual is treated as having sold all their capital property, including stocks, real estate, and private corporate shares, at Fair Market Value (FMV) immediately prior to their death. 

Think of it like CRA pretends as if you sold everything the day before you passed away, but in reality, you actually didn’t sell anything. 

For substantial estates, this automatic “pretend sale” frequently triggers a massive tax bill on an individual’s terminal tax return, often forcing executors to liquidate family assets, real estate, or business holdings just to satisfy the CRA. 

However, if the deceased leaves these capital assets to a surviving spouse or common-law partner, a critical relief provision steps in: the Spousal Rollover. Understanding how this rule functions and knowing exactly when an executor should strategically elect out of it, is one of the most vital components of estate planning. 

At Vertical CPA and at Taxhelp.ca we help Canadian businesses move beyond basic record-keeping to proactive compliance. Below are the top five common bookkeeping errors that act as red flags, inviting unwelcome scrutiny from the CRA. 

What is the Spousal Rollover? 

Under Section 70(6) of the Income Tax Act, when capital property transfers to a surviving spouse, a common-law partner, or a qualifying spousal trust, the transaction bypasses the standard Fair Market Value rule. Instead, the transfer occurs on a tax-deferred basis. 

The assets shift to the surviving partner at the deceased’s original Adjusted Cost Base (ACB) or, in the case of depreciable property like real estate, its Undepreciated Capital Cost (UCC). 

The Immediate Practical Effects:  

• • Zero Immediate Tax: Capital gains and depreciation recapture taxes are not triggered on the deceased’s final (terminal) return. 

• • Tax Deferral, Not Elimination: The surviving spouse inherits the asset at the deceased’s original historical cost. The tax liability is simply deferred until the surviving spouse either sells the asset or passes away.

• • The 36-Month Vesting Window: To qualify for the automatic rollover, the property must “vest indefeasibly” (meaning the legal ownership is completely locked in) for the surviving partner or spousal trust within 36 months of the date of death. 

Asset Transfers Upon Death 

Navigating the estate requires categorizing assets accurately, as the spousal rollover applies differently across property types:  

• • Non-Registered Investments & Real Estate: Automatically rolls over at the original Adjusted Cost Base (ACB). The executor can selectively choose to elect out under Section 70(6.2) on a property-by-property basis (see below) 

• • RRSPs & RRIFs: If the surviving spouse is designated as the beneficiary, the funds transfer tax-free to the survivor’s own RRSP/RRIF as a “refund of premiums.” The executor cannot choose a partial step-up here; if it doesn’t roll over, the entire account value is taxed as regular income on the terminal return 

• • TFSAs: Bypasses the terminal return completely. If the spouse is named as a “Successor Holder,” they step into the deceased’s shoes, and the account remains fully tax-sheltered without affecting the survivor’s existing TFSA contribution room.

• • Non-Registered Stocks and Market Portfolios: When a person passes away holding an open (non-registered) investment account, every stock, bond, and mutual fund is subject to the deemed disposition rules. The shares transfer directly to the surviving spouse’s non-registered account. The survivor inherits the deceased’s original Adjusted Cost Base (ACB). No capital gains tax is triggered on the terminal return, even if the portfolio grew by millions. 

A Special Note about Real Estate  

Real estate is often the most problematic asset in an estate because it is illiquid. You cannot easily slice off a piece of a house to pay a tax bill. 

• • The Automatic Rollover: If a secondary property (like a family cottage or a residential rental property) is left to a surviving spouse, the property transfers at its original cost base. This completely avoids an immediate, crushing tax bill that might otherwise force the family to sell the property just to pay the CRA. 

• • The Depreciation Trap (Recapture): For rental properties where the deceased claimed Capital Cost Allowance (CCA) to lower their rental income over the years, death usually triggers “recapture” (where all past tax write-offs are added back to the final return as regular income). The spousal rollover safely defers this recapture, passing the historical Undepreciated Capital Cost (UCC) to the surviving partner.

• • The Principal Residence Exemption (PRE): If the property being transferred was the deceased’s primary home, the PRE can wipe out the capital gain entirely. However, if the deceased owned both a home and a cottage, the executor must strategically decide which property utilizes the exemption. Electing out of the spousal rollover on one of the properties allows the executor to apply the deceased’s PRE to the cottage gains up to the date of death, saving the surviving spouse from a massive future tax bill. 

The Strategic Move: Electing Out of the Spousal Rollover 

While the spousal rollover applies automatically, Section 70(6.2) grants the estate’s executor the legal authority to elect out of the rollover on an asset-by-asset basis.  

If the executor makes this election, the specific asset is subjected to the standard deemed disposition rule: it is treated as sold at Fair Market Value on the terminal return, triggering the capital gains tax immediately. 

While intentionally triggering a tax bill sounds counterintuitive, doing so is highly tax-efficient in three specific scenarios: 

1. Fully Utilizing the Deceased’s Lower Tax Brackets

If the individual passed away early in the calendar year or had minimal income before their death, their terminal return might fall into the lowest marginal tax brackets. By electing out of the rollover on a portion of an investment portfolio, the executor can intentionally trigger capital gains to absorb those low tax brackets and the deceased’s basic personal tax credits. 

The Result: The surviving spouse inherits that specific asset at a higher, “stepped-up” Adjusted Cost Base (ACB), significantly reducing the survivor’s future tax bill when the asset is eventually liquidated. 

2. Offsetting Capital Losses and the “Year of Death” Rule

Capital losses incurred during a person’s lifetime can normally only offset capital gains. However, the year of death features unique flexibilities. If the deceased possessed accumulated net capital losses from previous years, or if specific estate assets dropped in value at death, those losses are lost forever if not utilized.  

By electing out of the spousal rollover on an asset that has appreciated, the executor triggers a gain to completely offset those losses, stepping up the asset’s cost base for the surviving spouse completely tax-free. 

3. Triggering the Lifetime Capital Gains Exemption (LCGE)

If the deceased owned Qualified Small Business Corporation (QSBC) shares, they may be eligible for the Lifetime Capital Gains Exemption (LCGE). If those business shares simply roll over to the spouse at the historical cost base, the deceased’s LCGE shelter is permanently wasted. Electing out allows the executor to trigger the capital gain on the final return, apply the LCGE to wipe out the tax liability to zero, and pass the shares to the surviving spouse with a massively elevated ACB. 

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The accounting and tax information provided in this post does not constitute advice and is meant to be for general information purposes only. The information is current as at the date of this post and does not reflect any changes in accounting and/or tax legislation thereafter. Moreover, the information has been prepared without considering your company or personal financial/tax circumstances and/or objectives.