How to Calculate Adjusted Cost Base for Inherited Property

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I sold a building that I inherited over 20 years ago. I don’t know the adjusted cost base (ACB) or fair market value of the building in 2003. How do I determine the value?
—Bill

Reporting the sale of a property in Canada

When you sell real estate in Canada you must report the sale on your tax return, even if no tax is owing. Since 2016, this reporting requirement also applies when the sale is tax-free because the property qualified for the principal residence exemption. Reporting ensures the Canada Revenue Agency has a record of dispositions, and it avoids penalties or reassessments later.

When someone dies, their assets are generally treated as if they were sold at the date of death and any tax owing is calculated on the deceased’s final tax return and paid by the estate. That deemed disposition is the starting point for determining the value of property that passes to heirs.

Property inherited from a spouse or common-law partner

If you inherited the property from a spouse or common-law partner, the tax rules work differently. Spousal transfers typically occur at the deceased spouse’s original cost (a tax-deferred rollover) unless the estate’s executor elects to report a different value. In practice, that means you may not need the 2003 fair market value—rather, your ACB may be the original purchase cost the deceased paid. Alternatively, if the executor elected an alternate value because the deceased had low tax in their year of death or available deductions or credits, that elected value would become the tax cost for you.

The term adjusted cost base (ACB) refers to the tax cost of a capital asset. ACB normally includes the original purchase price, acquisition expenses (for example, land transfer taxes or legal fees), and later adjustments such as permitted capital improvements or certain other increases in cost.

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What to do when the adjusted cost base is unknown

If the property did not pass to you from a spouse or common-law partner, you will generally need to establish the property’s value at the time you inherited it. That value is the fair market value on the date of death and is the ACB you use to calculate any capital gain when you sell. Sometimes that value was reported on the deceased’s tax return; for a principal residence it might not have been reported at all.

If you don’t have a record of the value, there are several practical ways to reconstruct it. Start by searching any surviving paperwork: the deceased’s tax returns, estate records, wills, attorney or executor files, and any real estate closing documents. If records aren’t available, consider these options:

Contact a licensed realtor to research comparable sales in the neighbourhood around the date you inherited the property. Realtors can produce historical local sales data that helps estimate fair market value in that year.
Hire a certified appraiser who can perform a historical valuation using sales, land transfers and market conditions at the relevant time. A formal appraisal gives a reasoned, documented estimate you can rely on when filing your return.
Use multiple sources — historical listings, municipal records, and archived property assessments — to triangulate a reasonable value if a formal appraisal is impractical.

A formal Canada Revenue Agency appraisal is an option but not a prerequisite for filing your tax return; a well-documented valuation from a qualified appraiser or realtor is usually sufficient.

Don’t forget about renovations and rental income

If you made capital improvements after inheriting the building, those costs should be added to your ACB, reducing any capital gain on sale. Keep invoices, permits, and contractor records to support these additions to cost. Routine repairs and maintenance are not added to ACB, but larger renovations that increase the property’s value typically are.

If the property was used as a rental, other tax rules apply. You may have claimed capital cost allowance (CCA), or depreciation, to reduce rental income in earlier years. Any CCA claimed in prior years is subject to “recapture” when the property is sold and is included in your income for the year of disposition to the extent it exceeded the net proceeds attributable to depreciable property.

What if the property was owned in a corporation?

If the building was held by a corporation and you inherited shares in that corporation, the tax situation is different. Corporations do not die when a shareholder dies, so the corporation’s tax cost of the property remains what it originally paid. In that case, it’s the corporation’s historical cost and any corporate tax rules that determine gain or loss when the corporation disposes of the property. Shareholders who inherit corporate shares face separate tax considerations that go beyond the scope of this answer.

Assuming no corporate ownership, the value at the date of inheritance (or the spousal rollover amount, if applicable) is your starting point to calculate ACB and any subsequent capital gain.