Inheriting Real Estate in Canada: What Should I Do Next?

In Canada, there are no inheritance taxes or inheritance tax exemptions. However, there are several scenarios where a person might be required to pay taxes on the property or properties they may have inherited. 

Figuring out the basics of Canadian inheritance tax laws can be overwhelming. Luckily, with Buttonwood Property Management, we provide expertise in understanding the tax consequences of inheriting property and how to navigate Canada’s rigorous tax system. 

Key takeaways: 

• In Canada there are no inheritance taxes or inheritance tax exemptions, although certain criteria may apply to the property. 
• When selling a primary residence, capital gains are not taxable.
• Inheriting property as a form of secondary place of residence will be required to pay capital gains taxes
• A secondary place of residence, such as a vacation home, which is still part of an estate, may be subject to capital gains taxes.
• Selling an inherited property, or those received as a gift may be subject to 50% capital gains taxes as part of personal income tax. 

What Are the Rules for Canadian Inheritance Tax on Property?

Inheritance taxes are the last thing anyone wants to think about when coming to terms with the loss of a loved one. Nonetheless, there are several important components to know about Canadian inheritance taxes, and these include:

1. Any property left behind by a deceased individual as a disposition, meaning that the person had disposed of their properties before they died. 
2. The market value of inherited properties is considered tax-free, and should someone leave their property as a principal residence, they will not be required to pay estate taxes for claiming ownership. 
3. A secondary place of residence, such as a vacation home, which is still part of an estate, may be subject to capital gains taxes. 
4. Those inheriting property as a form of secondary place of residence will be required to pay capital gains taxes on their estate before being able to take ownership of the property. 
5. Similar rules will apply to commercial properties as the above.

What Is a Capital Gain and the Capital Gains Tax?

To understand the inheritance tax laws it’s important to get an understanding of what capital gain is.

What is capital gain? 

Any profit made on an asset or capital property when selling is considered as a capital gain. 

For example, you buy an asset at $30,000 and several years later decide to sell this asset for $100,000. The capital gain is the difference between the purchase price and the sale price, which in this case is $70,000.

• Capital gains are viewed as taxable income. 
• Capital gains taxes are the percentage owed on profits. 
• Capital gains are reported as part of your income taxes. 

What is capital gains tax? 

For individuals who decide to sell an inherited property, you will be required to report and pay capital gains taxes and inheritance tax. Any profits made on the sale of the inherited property will be regarded as taxable income. 

Calculating capital gains taxes on inherited property may look as follows: 

Sale Price of Property – Fair Market Value at Time of Purchase = Capital Gain

E.g. $850,000 – $275,000 = $575,000

Four different situations you need to be aware of:

1. When selling a primary residence, capital gains are not taxable. Passing a primary residence through inheritance is considered a primary residence sale, and is exempt from capital gain. 
2. Selling a property will be subject to taxation of 50% of the capital gain. 
3. Selling a secondary residence is subject to capital gains taxes. 
4. Selling a commercial property is subject to capital gains taxes. 

How Do I Figure Out the Capital Gains Tax Rates on Inheriting Real Estate in Canada?

1. Get An Appraisal & Save Any Older Records

Get a fair market appraisal of the property’s value for probate purposes. This information will help to determine the property’s value since taking possession and can be used for future sales. 

2. Pay Capital Gains Tax If You Inherited A Secondary Property

Any secondary property that is not used or considered the primary residence will be considered taxable once inherited. Should you be unable to pay the taxes, the value thereof will be taken out of the deceased’s estate. If the property is considered a primary residence, you will then be subject to 50% owed taxes of the capital gain. 

3. Pay Capital Gains Tax When Selling The Property

When selling a property or property that was received as a gift, you are subject to paying 50% of the usual capital gains taxes as part of your income tax. Inherited property that remains under your ownership, without selling or generating capital gains will not be subject to capital gains tax. This would entail that the property was a primary residence of the deceased individual, and the estate of the deceased will pay any outstanding taxes at personal income tax rates. 

4. Plan For Your Estate’s Future

Take note of the following when planning your estate: 

• Keep a ledger of up-to-date appraisals of the real estate, including commercial residential, vacation, or other types of property. 
• Organize all documents, including an appraisal of the property when purchased. 
• Keep a record of property taxes paid and any other taxation documents. 

5. Consider Renting

Another route to consider is renting out the property, should you already have a primary residence. In this case, you will be subject to paying capital gains tax on the return generated from the rental income, and the inheritance will be considered as an investment property. 

The Role of Insurance in Real Estate Investment

When holding onto a property, or purchasing a new property as a real estate investment to rent it out, individuals will be required to obtain insurance for financial and legal purposes.

Liability Coverage 

The liability coverage helps to cover and pay for legal expenses, medical bills, and other settlements should a tenant or visitor succumb to injury or death while present on the rental property. 

Loss Of Rental Income Coverage 

Real estate investment insurance assists with compensation for loss of rental income should a property be deemed uninhabitable or vacant due to forces outside of your control.

Building and Property Coverage 

The coverage will apply to the physical structure and may include the building, and other structural features such as the roof, walls, windows, or additions on the property. The property and physical structure will be insured against specific elements such as natural storms, vandalism, repairs, maintenance, and construction. 

Risk Coverage

Certain policies may include the coverage of specific risks, both natural and unnatural. These may include natural events such as earthquakes, fires, overland flooding, or any damage caused to a property due to natural events. 

Additional Coverage 

Depending on the type of policy, a real estate investor, landlord, or those owning a rental property may incur coverage for certain agreed events. This may include events such as if a tenant is temporarily displaced, which would assist tenants in covering additional accommodation costs and other expenses.

Managing Real Estate Portfolios Across Generations

Real estate investment is often considered one of the more proactive ways of building wealth over time, enabling individuals to secure their investments and ensure the financial future of those they have included as part of their property portfolio. 

Create a purposeful portfolio 

Whether you may be the founder of an estate, or simply a beneficiary of one, ensure to leverage the opportunity to determine the forward-looking potential of the estate. Diversification can help to promote long-term success, evaluate risks more effectively, and provide buoyancy against economic and market changes. 

Assign capable stewards

Next, ensure that those assigned as beneficiaries to the estate have credible knowledge of managing real estate assets, including investment properties. Assigning a capable steward would ensure that the portfolio is actively managed and that investment decisions are made based on data-driven results that will best benefit the long-term well-being of beneficiaries and the estate itself.

Make an effort with estate planning 

Provide yourself, and others with the necessary guidance to understand estate planning. When there are various factors to consider, outside of the traditional legal and tax-related factors, estate planning can equip you and your beneficiaries with the necessary tools to understand how to manage an estate more effectively, and how proper decision-making can help the estate live through multiple generations. 

Echo the importance of family governance

Finally, create effective communication channels among family members, including estate planners or financial advisors. Family governance can include various things such as periodic meetings, quarterly reviews, and clear guidelines as to what information is shared with which family members.

Understanding Property Depreciation and Long-term Holding

Property depreciation can occur over time and is an accounting-based method used to determine the loss in value of a property compared to current and everyday use. 

For instance, individuals may be eligible to claim capital cost allowance (CCA) on the depreciation as part of a tax deduction. This would enable them to reduce their tax return and the possible taxes owed on the property. 

Limitations on capital cost allowance

1. The physical land the property is standing on is exempt from depreciation, and in this instance will most likely only refer to the physical structure and any additions such as the roof, heating and cooling, plumbing, and electrical components. 
2. Routine maintenance and repair carried out on the physical structure are considered current costs and do not qualify as depreciable expenses. Owners will be eligible to deduct these expenses as a whole in the financial year they have been completed. 

The Importance of Professional Guidance in Estate and Tax Planning

For any individual, estate planning is an important process that involves financial management and decision-making and ensures that all financial assets are fairly distributed according to a person’s final wishes and demands. 

Provides informed market insights: Estate planners assist with objective assessment of your financial circumstances, and further provide the necessary insights based on your financial goals and risk tolerance. 

Promotes actionable risk management: An estate planner will determine the appropriate balance of assets that will need to be included in your estate, and which strategy will work most effectively based on your initial risk assessment. 

Transparent advice: Estate planning professionals harbor decades of experience which can be used as a valuable tool to help determine market behavior, analyze any new investments, and determine the near and short-term risks a person may encounter. 

Continuous monitoring, adjustment, and planning : Planning professionals can assist with continuous monitoring of an estate, making the necessary adjustments based on market behavior and changing financial goals.

Objective decision-making: Instead of managing every aspect yourself, and often allowing subjective decisions to dictate investment choices, estate planners are seen as objective partners throughout the process. 

The importance of using a tax professional for estate planning 

Expertise: Tax professionals can help individuals navigate the tax system more effectively, make tailored recommendations, and provide services that are compliant with tax regulations. 

Tailored Solutions: Ensure a more tailored or individual process that considers the various aspects of an estate, and compile tax returns based on the basic requirements and demands of tax jurisdictions. 

Tax Education: Access to continuous learning resources to help you make more informed financial decisions that will have the best impact on your estate. 

Compliance: With the guidance of an estate planner and tax consultant, you can make decisions based on your financial goals, while remaining compliant with local and federal laws.

FAQs About Inheriting a House in Canada

Do I Pay Taxes On Inherited Property?

There are no immediate taxes related to inherited property or real estate unless the property is categorized as the secondary residence of the deceased individual. 

Are Capital Gains Due On Inherited Property?

This depends, although capital gains tax is not due on inherited property, unless under the following conditions:

1. The inherited property was a secondary residence or vacation home. 
2. The property will be converted into a rental property. 
3. The inherited property is sold for a profit. 

Do You Have To Report The Sale Of Inherited Property in Canada?

Yes, in Canada all property sales must be reported as part of your personal income tax. Individuals selling an inherited property that was a primary residence will need to report this and pay 50% of the capital gains tax on top of income taxes. The taxable amount required will be charged based on the difference in the fair market value assessment from when a person receives the property until it is sold. 

How Long Do I Have To Sell An Inherited House?

There is no limit, however, when an inherited property is sold, you will be taxed at 50% of the property’s change in fair market value as a capital gains tax should the property have been a primary residence of the deceased individual. 

What Is The Holding Period For Inherited Property?

There are no rules in Canada regarding the length or period a person can hold an inherited property. Owners of inherited properties will still be required to report and pay property taxes.

Do You Need To Declare Inheritance On Your Tax Return?

There are no inheritance taxes on general inheritances in Canada, and these inheritances, along with gifts are not required to be decreased when you pay income tax.

When should I declare inheritance on a tax return? 

In some instances, inheritance properties must be declared in certain situations, including: 

1. A property is sold. 
2. Completing the final income tax return of a deceased individual. 
3. Capital gains taxes owed in an estate. 
4. A secondary property i.e. vacation home is inherited as part.
5. An inherited property is converted into a rental property.

How Is Capital Gains Calculated On the Sale of Capital Property?

In Canada, primary residences that are inherited are taxed at 50% of the change in fair market value assessment when they are sold. Second homes, such as vacation homes, are taxed at the full capital gain rate when they are inherited, so the standard capital gains rules apply to later sales.

Conclusion

Although this guide covers some of the basic principles of property inheritance and taxes in Canada, Buttonwood Property Management unfortunately cannot provide specific advice or guidance on the subject, and individuals are required to reach out to an experienced accountant, estate planner, financial advisor or or tax professional. Buttonwood Property Management has an experienced team of real estate agents that can assist you and other individuals with managing their property, should they decide to keep the inherited property.