If the house has been on the market for a while for $1.7 million, and it hasn’t sold, it’s not a $1.7 million house.

Not even remotely how that works. Capital gains kicks in when you sell an asset, not when you buy or receive it. And Canada has an exemption on cap gains for your primary residence anyways. So as long as whoever wins it decides to actually live there most of the year, they’re in the clear.