Dealing with your feelings of loss after the death of a loved one can be very exhausting; figuring out what to do after inheriting real estate from them just adds another layer to this exhaustion.
Inheriting real estate and other assets is on the rise, and many people will be faced with the issue of figuring out the intricacies of inheritance tax laws in Canada.
While there is no inheritance tax in Canada, which means there are no inheritance tax rates or inheritance tax exemptions, there are quite a few situations where taxes might be owed on the properties that are now in your possession. The problem for most people is figuring out if those taxes apply to them! It’s important to get an understanding of the tax consequences of inheriting property.
Let’s review the basics of Canadian inheritance tax laws when it comes to dealing with tax on a capital gain and selling any inherited properties at fair market value for profit.
What Are the Rules for Canadian Inheritance Tax on Property?
When someone dies, the Canadian government sees the matter as a deemed disposition, which means that the person disposed of their properties right before they died. However, those properties are still part of their estate. Generally speaking, the market value of inherited properties is considered to be tax-free. If someone passes away and leaves their house to their children as a principal residence, they will not have to pay estate taxes for taking over ownership of the property.
However, there is a small exception worth noting here. If your parents leave you a secondary place of residence, such as a vacation home, as part of their estate, the capital gains taxes will be your (or their estate’s) responsibility to cover before you can take over ownership. Commercial properties are treated in the same way.
To understand the inheritance tax laws and everything you may be responsible for as you sort through the inherited assets received from a deceased person, it’s important to get an understanding of what capital gain is.
What Is a Capital Gain and the Capital Gains Tax?
The profit you make on assets or capital property when selling is known as a capital gain.
For example, if you buy a gold ring for $20,000 and later sell this rare piece for $100,000, your capital gain would be the difference between the purchase price and the sale price: $80,000. It would have to be reported on your income tax return.
Because capital gains are considered to be a type of taxable income, the capital gains tax is the amount of money you must pay on the profit made in this type of sale, and it’s reported as part of your income taxes.
Many people who inherit property from a family member ultimately decide to sell it because they already have their own home or they have no interest in keeping it up. If you choose to sell, you will have to deal with the inheritance tax in Canada.
While this seems fairly straightforward, it is not always easy to calculate this number.
There are four different situations that most people need to be aware of:
- When selling your primary residence, capital gains are not taxable. The passing of a primary residence through inheritance is considered a primary residence sale, and as such, there is no capital gain.
- When selling an inherited property, you are liable for the taxation of 50% of the capital gain.
- When selling secondary residences, capital gains are taxable.
- When selling a commercial property, capital gains are taxable.
A traditional capital gains amount is calculated by subtracting the fair market value at the time of purchase from the sale price. When you are selling an inherited property, however, you may not know the purchase price, and the value is often calculated from the time that you took possession of the property.
So, while there is not an inheritance tax on property in Canada, there are a number of things that you must understand to make sure you file and pay all appropriate taxes at your personal income tax rates.
When you inherit property, whether real estate or anything else, the CRA applies what is known as a stepped-up basis to that asset. For tax purposes, your item’s base price will be reset on day one!
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How Do I Figure Out the Capital Gains Tax Rates on Inheriting Real Estate in Canada?
Now that you have an understanding of what capital gains are and why they matter when inheriting capital assets let’s break down what you should do for tax purposes when you inherit the real estate of any type.
1. Get An Appraisal & Save Any Older Records
Regardless of whether or not you plan to sell your inherited property, the first thing you should do is get a fair market appraisal of the property’s value for probate purposes. Having this information about the property’s value when you take possession will be useful if you ever sell or gift it to beneficiaries such as your children or a surviving spouse, or a common-law partner.
Never skip this step of getting the value when acquiring assets through inheritance. It can save you a lot of work at a later date, so this is the only thing you should focus on doing as soon as the property is yours.
2. Pay Capital Gains Tax If You Inherited A Secondary Property
As previously mentioned, vacation homes are considered to be taxable if you inherit them.
Let’s say your parents bought a vacation home for $50,000 in the 70s. When you inherited it, it had a value of $125,000. This means that you would owe capital gains taxes on the $75,000 increase in capital. If you choose not to or cannot pay this, the value will be taken from the deceased’s estate.
Had this home been a primary residence, you would only owe tax on 50% of the capital gain.
3. Pay Capital Gains Tax When Selling The Property
If you decide to sell an inherited property or a property that was gifted to you, you will be responsible for paying 50% of the usual capital gains tax as part of your income tax when you do so. Knowing this in advance will help you better understand what type of property margin to expect from the sale.
If you choose to keep the property, you will not need to pay a capital gains tax as it was a primary residence, and the final tax return of the deceased will pay any owed tax at their personal income tax rates. Should you choose to sell the property in the future, you will need to pay 50% of capital gains when you do so.
One consideration is the lifetime capital gains exemption, which could apply to shares of a qualified privately held small business corporation, a qualified farm property or a qualified fishing property. You should speak to an accountant if the inherited property fits any of these categories.
4. Plan For Your Estate’s Future
Now that you know the tax consequences of inherited real estate in Canada, you can set up the future of your estate to make the process simpler for any beneficiaries.
Keep up-to-date and organized appraisals of all real estate, commercial, residential, vacation, or otherwise. Whether you ultimately decide to sell these properties or leave them to your children, a surviving spouse or common-law partner or someone else in your will, the documents will help ensure a clear record of taxation requirements at a later date.
5. Consider Renting
If you already have a primary residence, but you decide to keep the inherited property and turn it into a rental property, you will need to pay capital gains taxes as you are converting it into an investment property.
After you inherit a house, you have more options than just selling. Although converting an inherited property into a rental property would require you to pay capital gains taxes, some may see the appeal in taking on the job title of Rental Investor to earn extra income.
FAQs About Inheriting a House in Canada
Do I Pay Taxes On Inherited Property?
When inheriting a home, there are no taxes that you will need to pay immediately unless the property is a secondary (non-primary) residence of the deceased. Any capital gains taxes that are owed on the property for the transfer are handled as part of the final income tax rates of the deceased, and the Canada Revenue Agency treats it as if it was sold by the deceased. A clearance certificate is required to certify that the person’s estate paid all the necessary taxes.
Are Capital Gains Due On Inherited Property?
Capital gains tax is not due on an inherited property unless one or more of the following applies:
- It was a secondary or vacation home
- It will be converted into a rental property
- You sell it
Do You Have To Report The Sale Of Inherited Property in Canada?
All property sales must be reported properly as part of your income tax in Canada. If you are selling inherited a real estate that was a primary residence, you will need to report it and pay 50% of the capital gains tax with your income tax. The tax will be charged based on the difference in the fair market value of the property from when you received it to when you sold it.
How Long Do I Have To Sell An Inherited House?
There is no time limit on when you must sell an inherited house in Canada after inheriting it. Regardless of when you sell it, you will be taxed at 50% of the property’s change in fair market value as a capital gains tax if it was/is a primary residence and not something like a vacation home.
What Is The Holding Period For Inherited Property?
There is no minimum or maximum holding time for inherited property in Canada. Unlike other countries where the taxes change depending on how long the inheritance is held before selling, there are no such rules in Canada.
One thing to keep in mind is that you will continue to owe property taxes as long as you hold it; make sure that you are prepared to handle these if you want to hold onto them. Selling the home quickly if you have no plans to keep it long-term can be a smart way to avoid unnecessary taxes in Canada.
Do You Need To Declare Inheritance On Your Tax Return?
Gifts and inheritances in Canada do not need to be declared with your income tax, as there are no inheritance taxes on general inheritances. Inherited properties, however, must be declared in certain situations:
- When they are sold
- When filling out the final income tax returns for a deceased person, their estate will owe tax for capital gain.
- When a vacation home is inherited as part of an estate
- When an inherited property is converted into a rental property
In these situations, there are some taxes that may be owed, so it is necessary to make sure that the sales and transfers of the properties are properly declared in income tax returns.
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 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.
Dealing with the capital gains tax on inherited property in Canada can be very complicated, especially if you are not familiar with the intricacies of tax laws. Thankfully, there aren’t too many exceptions you need to keep up with, and this guide covers most of what you need to know about these laws.
While we are happy to provide general information about these topics here, we cannot give you specific advice. To handle your own situation and get the most up-to-date information, contact an accountant to assist you with the transfer and documentation.
While you decide whether or not to hold onto the property in question, an experienced property management company can help you effectively manage it while you work through the process.