Deemed Disposition

A deemed disposition is when the Canada Revenue Agency (CRA) treats you as if you sold an investment, even though you never actually did. The CRA calculates the capital gain or loss based on the investment’s fair market value at that moment, and you (or your estate) may owe tax on any gains. No shares change hands, no money moves, but the tax bill is real.

When it happens

The most common situation is death. When someone passes away, the CRA treats all of their investments as sold at fair market value on the date of death. Their estate has to report any resulting capital gains and pay the tax owed before assets can be distributed to beneficiaries.

Emigration is another trigger. If you leave Canada and become a non-resident, the CRA considers most of your investments sold on your departure date. This is sometimes called a “departure tax.” You haven’t sold anything, but you need to settle up on any gains that accumulated while you were a Canadian resident.

Transferring investments from a non-registered account into a registered account (like a TFSA or RRSP) also triggers a deemed disposition. The CRA treats the transfer as a sale at fair market value, and you may owe tax on any gains at that point.

Example

Say someone passes away holding $200,000 worth of stocks in a non-registered account that they originally purchased for $80,000. The CRA treats those shares as sold at $200,000, creating a $120,000 capital gain. At the current inclusion rate, half of that gain ($60,000) gets added to the deceased’s final tax return as taxable income. Depending on their other income, the tax bill could be $15,000 to $25,000 or more.

Why it matters

Deemed dispositions can create unexpected tax bills if you’re not prepared for them. Knowing your adjusted cost base on all holdings helps you estimate what a deemed disposition would cost. This is especially important for estate planning. If a large portion of someone’s wealth is in investments that have grown significantly, the tax bill at death can be substantial.

There are some exceptions. Transferring assets to a surviving spouse or common-law partner can defer the deemed disposition until that spouse eventually sells or passes away. For more on how capital gains work in Canada, see our capital gains tax guide.