Deemed disposition at death: Canada vs US

The Canadian deemed disposition at death

Canada does not have an estate tax. Instead, it taxes the gain that built up in your property during your life, and it collects that tax at death through a rule called the deemed disposition. Under section 70(5) of the Income Tax Act, you are treated as having disposed of each capital property at its fair market value immediately before you died. You did not actually sell anything, but the tax system pretends you did, so the entire accrued capital gain is realized in your final year and reported on your final T1 return.

For a Canadian who owns a Florida condo, this means the difference between what the condo is worth at death and its adjusted cost base is a capital gain on the final return, even though the property simply passes to the heirs. The deemed disposition applies to worldwide capital property, so Florida real estate is squarely inside it. This is the Canadian side of the death-time tax picture, and it is owed to the CRA, not to the United States.

How much of the gain is taxed: the 50 percent inclusion rate

Canada does not tax the whole capital gain. Only a portion, the inclusion rate, is added to taxable income, and the rest is tax-free. The inclusion rate is one-half, or 50 percent. The 2024 federal budget proposed raising it to two-thirds for individual gains above a threshold, but that increase was first deferred and then cancelled by the federal government on March 21, 2025, so the rate that applies remains 50 percent.

The practical effect on a death-time deemed disposition is that half of the accrued gain on the Florida property is added to the deceased's income on the final T1 and taxed at their marginal rate, while the other half is not taxed at all. There is no separate death tax rate; the included half is simply ordinary taxable income in the year of death.

The United States step-up in basis

The United States approaches death from the opposite direction. It does not tax the deceased on an accrued gain. Instead, under Internal Revenue Code section 1014, the person who inherits the property takes a cost basis equal to the property's fair market value at the date of death. This is the step-up in basis. The gain that accrued during the deceased's lifetime simply disappears for US income-tax purposes, because the heir's basis is reset to the death-date value.

For the heir of a Florida condo, the step-up means that if they sell the condo soon after death for roughly its date-of-death value, there is little or no US capital gain to report, because their basis already equals that value. The United States does, separately, impose an estate tax that can reach a non-resident's US-situated assets above a low threshold, which is a different layer of tax discussed in the guide on the US estate tax for non-residents above USD 60,000. The step-up is about income tax and basis; the estate tax is about the value of the estate.

When the two systems meet on one Florida property

A Canadian who dies owning a Florida condo triggers both rules at once, and they do not cancel out. Canada taxes the accrued gain on the final T1 through the deemed disposition. The United States gives the heir a stepped-up basis, so there is little US income tax on a sale near the death-date value, but the US can still levy estate tax on the value of the Florida property. The risk is double taxation where the same property is hit by Canadian capital gains tax at death and US estate tax on the same asset.

The Canada-United States tax treaty contains relief for this overlap. It allows a form of credit so that US estate tax paid on US-situated property can be relieved against Canadian tax arising on death in respect of the same property, within limits. The mechanics are technical and fact-specific, which is why an estate with US real estate and a Canadian deceased almost always needs a cross-border tax professional to compute the interaction rather than treating the two systems in isolation.

The spousal rollover: deferring the Canadian tax

Canada provides an important exception to the deemed disposition. Under section 70(6) of the Income Tax Act, when capital property passes on death to a surviving spouse or common-law partner, or to a qualifying spousal trust, the property rolls over at its adjusted cost base rather than at fair market value. No gain is realized at the first death. Instead, the surviving spouse inherits the original cost base and the tax is deferred until the survivor later sells the property or dies.

For a couple who jointly enjoy a Florida condo, this means the death of the first spouse need not trigger Canadian capital gains tax on the property if it passes to the survivor on a rollover basis. The deferral is valuable, but it is not forgiveness: the accrued gain is still there, attached to the survivor, and it will be taxed on the survivor's deemed disposition unless it qualifies for relief again. The rollover can be elected out of in some situations, for example to use available losses, which is a planning decision best made with an advisor.

Canada versus the United States at death, side by side

Worked example: a Florida condo with an accrued gain

Suppose a Canadian bought a Florida condo years ago for USD 300,000, which is broadly its adjusted cost base, and it is worth USD 500,000 at death. The accrued gain is USD 200,000. On the Canadian side, the deemed disposition realizes that gain on the final T1. At the 50 percent inclusion rate, USD 100,000 is added to the deceased's taxable income and taxed at their marginal rate, while the other USD 100,000 is not taxed. For the actual return, the cost and the death-date value are each translated into Canadian dollars using the exchange rates on the purchase date and the date of death, so the taxable gain in Canadian dollars also captures any movement in the US dollar over the holding period.

On the United States side, the heir's basis steps up to USD 500,000. If the heir sells the condo shortly after death for about USD 500,000, there is little or no US capital gain, because the basis already equals the sale price. The United States may, however, assess estate tax on the USD 500,000 value if the estate exceeds the low non-resident threshold, which is the separate issue addressed in the related guide. The lesson in the numbers is that Canada collects on the USD 200,000 gain while the United States resets the basis, and the two results sit on the same property at the same time.

Common mistakes

The errors here come from assuming the two countries coordinate, when they do not.

The first is forgetting the Canadian deemed disposition entirely, and assuming that because the United States gives a step-up there is no death-time tax. Canada still taxes the accrued gain on the final T1. The second is assuming the US step-up shelters the Canadian tax; it does not, because it is a US basis rule that has no effect on the Canadian deemed disposition. The third is overlooking US estate tax, which is a separate layer from the income-tax step-up and can apply to the value of the Florida property. The fourth is mishandling the currency, computing the gain only in US dollars when the Canadian return requires translation into Canadian dollars at the relevant exchange rates, which can change the taxable amount materially. The fifth is missing the spousal rollover, paying tax at the first death on property that could have rolled over to the survivor at cost.

Checklist: handling death-time gains on US property

1. Identify the adjusted cost base and the fair market value at death of each US-situated capital property.
2. Compute the Canadian deemed-disposition gain, translated into Canadian dollars at the acquisition-date and death-date exchange rates.
3. Apply the 50 percent inclusion rate and report the included gain on the final T1.
4. Check whether a spousal rollover under section 70(6) applies or should be elected out of.
5. Assess separately whether US estate tax applies to the value of the US property.
6. Coordinate Canadian tax and any US estate tax through the treaty relief, with a cross-border professional.
7. Keep records of cost, improvements, and exchange rates, since the estate will need them to support the return.

FAQ

Does Canada have an estate tax like the United States?

No. Canada has no estate tax. It taxes the accrued capital gain at death through the deemed disposition under section 70(5), reported on the deceased's final T1. The United States, by contrast, has an estate tax on the value of US-situated assets, which is a separate matter from the Canadian gain.

If the US gives a step-up, why does Canada still tax the gain?

Because the step-up is a US basis rule that resets the heir's cost for US purposes only. It has no effect on Canada's deemed disposition, which taxes the deceased on the gain that built up during their lifetime. The two rules operate independently on the same property.

Can I avoid the Canadian tax by leaving the condo to my spouse?

You can defer it. A transfer on death to a surviving spouse, common-law partner, or qualifying spousal trust rolls the property over at its cost base under section 70(6), so no gain is realized at the first death. The deferred gain is taxed later, when the survivor sells or dies.

Will I be taxed twice on the same Florida property?

There is a risk of overlap, because Canada can tax the gain while the United States taxes the value through estate tax. The Canada-United States tax treaty provides relief that can credit US estate tax against Canadian tax on the same property, within limits. The relief is not automatic and should be computed by a cross-border tax professional.

What exchange rate do I use for the gain?

The cost and the death-date value are each converted to Canadian dollars using the exchange rate on the relevant date, so the Canadian taxable gain reflects both the change in the property's US-dollar value and the change in the US dollar itself over the holding period. This can increase or decrease the taxable gain compared with looking at US dollars alone.

Where do I report the deemed disposition?

On the deceased's final T1 return. The deadline and mechanics of that return are covered in the guide on the final Canadian T1 return for a deceased person.