Capital gains, taxes and more: The implications of inheriting real estate
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?
Is there tax on an inheritance in Canada?
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.
Probate fees are not taxes
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.
Is there tax on inherited real estate?
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.