Mr. Henderson (78) recently passed away. He owned a cottage valued at $700,000, purchased for $150,000, held solely in his name. His will leaves the cottage to his only daughter, Sarah. His marginal tax rate was 40% in his final year of life. Assuming no principal residence exemption has been previously claimed on the cottage, what are the tax implications upon his death?

Question: Mr. Henderson (78) recently passed away. He owned a cottage valued at $700,000, purchased for $150,000, held solely in his name. His will leaves the cottage to his only daughter, Sarah. His marginal tax rate was 40% in his final year of life. Assuming no principal residence exemption has been previously claimed on the cottage, what are the tax implications upon his death?

Answer options:

• The cottage will be transferred to Sarah tax-free as it is a bequest to a direct descendent. ✅ A capital gain of $550,000 will be deemed to have arisen, half of which is taxable at Mr. Henderson's marginal rate.
• The cottage’s adjusted cost base (ACB) will reset to its fair market value (FMV) at death for Sarah, but no tax is payable until she sells it.
• The gain on the cottage is deferred until Sarah sells it, as she is inheriting the property.

Correct answer: A capital gain of $550,000 will be deemed to have arisen, half of which is taxable at Mr. Henderson's marginal rate.

Explanation: Upon death, assets are deemed to be disposed of at their Fair Market Value (FMV). For the cottage, this triggers a capital gain of $700,000 - $150,000 = $550,000. 50% of this ($275,000) is included as taxable income in Mr. Henderson's final tax return, taxed at his marginal rate.