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I’ve been reading a lot of articles on how taxation works for inherited property. My mom has been asking me to look into this. I am so confused. From what I’ve read, the government treats it as if the deceased sold the property the day before they died. I understand there is probate tax to pay, but what else?
Let’s assume they paid $200,000 for the home and it is now worth about $800,000 for this example. What would be due? Is there an estate tax? Also, would my brother and I have to pay income tax if we sold it? Would it be better to rent it out? Is there any way to lower the taxation?
When a Canadian resident dies, they have a “deemed disposition” of their assets. It is as if the person sold them on their date of death, and this can trigger payable taxes, Eric.
But not everything is taxable. Some assets, like a savings account and cash, are not subject to income tax upon death. That is because they do not rise or fall in value. They generate interest income that is taxable as it is earned each year, including up to your date of death. However, some assets, like a registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) may be subject to income tax upon death.
For an RRSP or a RRIF, it depends on the beneficiary designation for the account or the terms of the deceased’s will. If a spouse receives the proceeds of the registered account, it may remain tax-deferred. If a financially dependent child or grandchild inherits, there may also be tax deferral. But if a non-spouse beneficiary receives the account proceeds, the full value is generally taxable on the final tax return of the deceased.
In order for assets to be distributed by an executor using the deceased’s will, there will generally be provincial probate fees or estate administration tax payable as well, Eric. This is not an income tax or part of the deceased’s final tax return—it is a separate legal process and resulting cost. The provincial fees payable vary by province.
For example, in Alberta, probate fees are capped at $525 for an estate exceeding $250,000. In Ontario, there is nothing payable on the first $50,000 of estate value and 1.5% on the rest. In Quebec, there are no probate fees, but there are court filing fees. Settling an estate also typically involves legal and accounting costs.
In the case of real estate, there is a deemed disposition upon death, and there may or may not be tax to pay. Taxpayers can claim a principal residence exemption for a qualifying property. Most people only own one home at a time, and their home will be tax-free upon sale—including a notional sale at death.
So, if someone owns two properties at once, like a house and a cottage, one property will generally be subject to capital gains tax.
Assuming, Eric, your mother has not owned another property during the period that she has owned her home, the deemed disposition upon her death will not likely lead to income tax payable. If she still owns the home when she dies, her executors—presumably you and your brother—will claim the principal residence election by filing form T2091IND Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust) along with her final tax return.
If you and your brother inherit your mother’s home from her, there may be subsequent tax implications for you.
If you both inherit the house, you will both have your own tax implications for your respective share independent of each other. If either of you is living with her when she dies, or one of you moves in to live in the house subsequently, the property may qualify as your principal residence.
But assuming that is not the case, if the property is subsequently sold for more than the value at the time of her death, you may have a capital gain. Since you can deduct selling costs like real estate commissions, if the property rises only slightly in value, these costs may wipe out any tax.
If you hold the property for a long time after your mother’s death, that increases the chance of a capital gain and the associated tax payable.
In terms of whether it would be better to rent out the property after her death, it depends. From an investment perspective, I would not say a rental property is any better or worse than investing in stocks or bonds—just different.
It takes more work to manage a rental property, but some people find it more comfortable and understandable than stocks and bonds. That said, if either you or your brother has room in an RRSP or a tax-free savings account (TFSA), keeping her home as a rental property may forgo those tax-planning opportunities.
You ask about estate tax, Eric. It’s common for Canadians doing online research to come across U.S. tax or estate information. U.S. citizens and residents may be subject to U.S. estate tax, which is payable on the value of their estate, much like probate or estate administration tax in Canada, and could be as high as 40%.
I hope that helps clarify some of your questions, Eric. The internet can be a good place for learning personal finance basics, but try to make sure you are looking at Canadian websites and resources that are current. It is common to stumble across U.S information that may not be applicable, or Canadian information that may be out of date. And when in doubt, it may be worth soliciting professional input.