The short version: Canada does not have a US-style "stepped-up basis." Instead, the CRA treats a person as having sold everything they owned at fair market value the instant before they died — this is called deemed disposition — and capital gains tax is calculated on that basis, reported on the deceased's own final tax return.
How deemed disposition actually works
When someone dies, the Canada Revenue Agency treats them as having disposed of (sold) all their capital property — including real estate — at its fair market value immediately before death, even though no actual sale took place. Any gain between what the property was originally worth (its adjusted cost base) and its fair market value at death is a capital gain. In Canada, only 50% of a capital gain is taxable, and that taxable amount gets added to the deceased's income on their final tax return, sometimes called the "terminal return."
The principal residence exemption
If the property was the deceased's principal residence for some or all of the years they owned it, the principal residence exemption can shelter some or all of that capital gain from tax — this is the exemption most people are relying on without necessarily knowing its name. It applies based on the years the property genuinely was the person's primary home, not automatically to every property someone happens to own at death.
A secondary property — a cottage, a rental, a vacation home that was never the principal residence — doesn't get this exemption, and can trigger a real, sometimes substantial capital gains bill on the estate.
What happens with a surviving spouse
Property passing directly to a surviving spouse (or a qualifying spousal trust) generally qualifies for an automatic spousal rollover, deferring the capital gain entirely until the spouse eventually sells the property or passes away themselves — meaning no immediate tax hit at the first death in most cases.
Mark Jontz routinely coordinates sale timing with estate accountants and lawyers on exactly this kind of tax question — the real estate sale itself and the tax picture need to be planned together, not treated as separate problems that happen to involve the same property.
A second layer: gains after death, before the sale
The deemed disposition calculation covers the gain up to the date of death. If the property's value keeps rising between then and whenever the estate actually gets around to selling it, that additional increase can be a separate taxable gain to the estate itself. This is a real, practical reason estates generally shouldn't sit on a property indefinitely once it's ready to be sold — delay has a potential tax cost, not just a carrying-cost one.
This page explains the general concept of deemed disposition and is not tax or legal advice. Every estate's tax situation depends on specific facts — please consult an accountant or estate lawyer about your specific circumstances.