Today in this article, we will explain the Canadian inheritance tax on property. Carefully read the entire article to understand everything before you face difficulties related to it.
Receiving an inheritance is always a bittersweet prospect. You gain financially, but you lose someone you love. Receiving an inheritance can be even more bittersweet when you realize the property you just received could come with some hefty new expenses, including taxes.
Taxes can be managed with the right knowledge and proper planning. Here’s everything you need to know about inheritance taxes on property in Canada.
- 1 Is Inheritance Taxable in Canada?
- 2 When is An Inherited Real Estate Property Taxed?
- 3 What is Canadian Inheritance Tax on Property?
- 4 Who Pays Capital Gains on Inherited Property in Canada?
- 5 How Do I Avoid Inheritance Tax on My Parent’s House?
Is Inheritance Taxable in Canada?
Canada doesn’t have an estate or inheritance tax per se. That does not mean that no taxes get paid when someone dies.
One of the first things an executor does upon receiving the go-ahead to administer the estate is to prepare a final tax return on the income the decedent earned up to the date of their death. The estate assets then pay out any monies owed. This must happen prior to issuing funds to beneficiaries.
Assets like real estate are considered to have been sold for fair market value at the time of death. The estate will pay capital gains taxes on the home just as if the decedent had sold it. Thus if the decedent purchased the home for an adjusted base cost of $300,000 and then died when it was worth $500,000, the estate itself has made a $200,000 capital gain. The adjusted base cost takes any capital improvements or home-buying costs into account. The executor will only do this after a professional appraisal has been made.
50% of that 200,000 becomes taxable income. The estate then pays out those taxes, and the home passes on to the beneficiary, who can decide to live in it, use it as a vacation property, use it as a rental property, or sell it.
If the beneficiary turns around and sells the property right away, they’d pay capital gains tax as well, but the estate has already done so on the original purchase price. At this point, the beneficiary would only pay capital gains tax on the market value of the home as assessed when the estate was closed out.
So if you inherit the property, which was taxed as if it was worth $500,000 and only managed to sell it for $480,000, then you’d actually take a capital loss, not a capital gain, on your own taxes. If you only sell it for $510,000, then you’ve only made a $10,000 capital gain, of which only $5000 is taxable. The capital gains tax for the beneficiary may thus be worth only a handful of dollars.
While this can feel like double taxation, remember that the beneficiaries didn’t lose anything. They still get a $500,000 home that they didn’t have to buy. The tax money did not come out of their pocket. They can do whatever they wish with the home and only pay capital gains if they sell it and realize a profit. If the home is already paid off, they stand to gain a pretty massive windfall, much of which will not be taxed.
When is An Inherited Real Estate Property Taxed?
The property is only taxed when you sell the property.
If you choose to hold onto it and live in it, it won’t be taxed.
If you choose to rent out the property, you’ll pay income taxes on the rent, but you won’t pay taxes on the property itself.
All of this information can help you make decisions about your best financial move. Other issues that you should take into consideration is,
- Whether or not you have the money to maintain the property.
- Whether or not you can afford the annual property tax.
- Whether or not the home is close enough to your job to realistically live in.
- Whether or not you want to become a landlord if you plan to rent the property.
- If there is a mortgage on the property you have to consider whether the mortgage company is willing to transfer the mortgage into your name
- whether or not you can make the monthly mortgage payments.
What is Canadian Inheritance Tax on Property?
It will depend on your tax bracket. Canada’s tax brackets are relatively straightforward.
- 15% on the first $49,020 of taxable income
- 20.5% on taxable income over $49,020 to $98,040
- 26% on taxable income from $98,040 to $151,978
- 29% on taxable income between $151,978 and $216,511
- 33% on taxable income over $216,511
Remember that only the taxable income is taken into consideration. You could sell the $500,000 property, realize just $2 in capital gains, and only $1 of that money would be added to your taxable income.
In the previous example, if you made $10,000 in capital gains because you turned around and sold the property fast, and this pushed your income from all sources over $216,511, then you’d still only pay $1650 on that sale.
Who Pays Capital Gains on Inherited Property in Canada?
Prior to disbursement of the property, the estate pays it. If you sell the property at any point, then you will pay capital gains on the sale.
How Do I Avoid Inheritance Tax on My Parent’s House?
There is no inheritance tax.
You can’t avoid capital gains taxes, not if you’re selling the home.
If you live in the home as your primary residence all the years you own, you won’t have to pay capital gains when you sell it. If you rent the home, you’ll pay taxes on the rental income but will not pay any form of capital gains tax.
Get Help from An Experienced Real Estate Lawyer Today!
We hope now you have enough knowledge about the Canadian inheritance tax on property. We have tried to explain everything you need to know in the easiest manner. If you have any further issues that you need to understand, contact us, and we will try to help you.
Our legal team has decades of real estate experience. Make sure your interests are protected. Our team is well-prepared to offer a great deal of support to serious investors.
Call (780) 488-4152 to set up an appointment today.