Epicardial cells on the heart's surface give rise to coronary artery smooth muscle cells (caSMCs) located deep in the myocardium. However, the differentiation steps between epicardial cells and caSMCs are unknown as are the final maturation signals at coronary arteries. Here, we use clonal analysis and lineage tracing to show that caSMCs derive from pericytes, mural cells associated with microvessels, and that these cells are present in adults. During development following the onset of blood flow, pericytes at arterial remodeling sites upregulate Notch3 while endothelial cells express Jagged-1. Deletion of Notch3 disrupts caSMC differentiation. Our data support a model wherein epicardial-derived pericytes populate the entire coronary microvasculature, but differentiate into caSMCs at arterial remodeling zones in response to Notch signaling. Our data is the first demonstration that pericytes are progenitors for smooth muscle, and their presence in adult hearts reveal a new potential cell type for targeting during cardiovascular disease.