Deemed Disposition

A deemed disposition is a provision in the Income Tax Act that treats a taxpayer as having sold a capital property — triggering a capital gain or loss — even though no actual sale has taken place. It is a legal fiction used by the CRA to ensure that accrued gains are eventually taxed, particularly when property changes hands or leaves the Canadian tax system without a market transaction.

The most common deemed disposition triggers relevant to business owners include: death (under ITA s.70(5), a taxpayer is deemed to have disposed of all capital property at fair market value immediately before death, which can trigger a significant capital gains tax on the estate); gifts and transfers at below fair market value to non-arm's-length parties (where the transferor is deemed to have received proceeds equal to the fair market value, regardless of what they actually received); and the 21-year rule applicable to family trusts (under ITA s.104(4), a trust is deemed to dispose of its property every 21 years, requiring gains accrued inside the trust to be reported and taxed unless the assets are distributed or rolled out to beneficiaries in advance).

In the context of estate planning and business succession, the deemed disposition on death is a central reason business owners engage in lifetime planning — including estate freezes, family trusts, and Section 85 rollovers — to manage the tax triggered at death rather than leaving it entirely to the estate.

See also: Estate Freeze, Family Trust, Capital Gains, LCGE, Section 85 Rollover.