Question: My mom passed away in 2006, leaving her primary residence to my two sisters & I. They live in Canada, but I have lived in the US for years. What is my tax implication?
For the purposes of this response, I assume your mother was a resident of Canada and that the executor of her estate is a resident of Canada.
Residency is important to determine which country has authority to tax the assets of the deceased. Under Canadian tax rules, if your mother was a resident of Canada at the time she passed away, then she is subject to Canadian tax law up to the date of death. If the executor is a resident of Canada then Canadian tax rules will apply to the estate following the death. If any one of the executors was a resident of a country other than Canada then the tax of the estate becomes very complex and may be subject to tax in another country or double taxation.
If one or more of the executors are residents of countries other than Canada, I suggest seeking professional estate and tax advice.
Tax Until The Date of Death
When a resident of Canada dies, the government considers the deceased to have sold all of the possessions immediately before they died. With respect to the residence, if your mother “ordinarily inhabited” the residence until the time of death, then there is no tax from the time the house was purchased until the date of death.
Tax Issues Following Death
After death, an estate trust is considered to have been created and all of your mothers’ assets are deemed to have been acquired by the trust immediately following death. The trust is considered to have purchased all of the assets of the deceased at their fair market value at the time of death.
Since a trust is not a person and cannot claim the tax exclusion on a principal residence (a trust cannot ordinarily inhabit a residence) then a taxable capital gain or loss may be generated if the house is subsequently sold for an amount that is more or less than the value of the home at the date of death. If however, the house was transferred to a beneficiary of the estate (as named in the Will), and that beneficiary or their spouse does not own a principal residence then the home may be transferred as of the date of death and there are no taxable capital gains.
If the house was transferred to all three of you, that is title is transferred, then each beneficiary will have a share of the property and will have been deemed to have acquired the property at its value at the time of death. The two residents of Canada may be entitled to the principal residence exclusion on their share but you as a non-resident cannot claim this exemption.
If the house was sold and the cash distributed then for Canadian tax purposes there are no tax implications for you. I believe (but am not sure) that there are no US federal tax implications either since you should be able to receive an inheritance without tax.
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My mother passed on feb. 17th 2008. She willed to my two children a lake front lot. In order to determine capitol gains (or losses) WHERE DO I BEGIN?
Note that I have edited out some personal information from the comment from Arnold. If I come across comments from new poster’s, I will normally edit out personal information. If you have posted some information you are not comfortable with being publicly displayed, please contact me via my contact form and I will edit it our or remove it.
@ Arnold:
I am sorry to hear of your loss.
The first step is to determine the cost base of the property. This would be the original purchase price (or its assessed value at December 31, 1971). Any improvements to the property would also increase the cost base and should be taken into account if your mother still has records.
Also, be aware that there may have been an election in 1994 to crystallize the gain on the property at that time in order to take advantage of the lifetime capital gains exemption.
Once you know the cost base, you need to determine the value of the property on the date of your mother’s death. You can ask a real estate agent to do an appraisal.
Note though, that any losses on the property are not taxable on personal property, only gains are.
This can be a complex issue and if you are not comfortable with that tax issues, I would strongly recommend you hire an accountant to do the tax returns and handle any portions you do not feel comfortable handling. The cost will save you headaches and potentially some taxes – well worth the cost.
A mother just passed away and her estate is worth approx. $400,000.00. Will her 3 children have to pay Capital Gains on her estate when they inhert this money.
@ Brenda,
Your mother will be deemed to have sold her possessions immediately before she passed away. The capital gain is difference between the original cost and the value of the property on the date of death. One-half of the gain, excluding a principal residence, is taxable. The estate is responsible for this tax.
Any property held by the estate (following death) that has gain (the difference between the value on the date of death and the value on the date of sale is taxable in the estate. This tax is paid by the estate.
Only when all of the taxes are paid can the assets be distributed and these assets are distributed after tax,
The house was bought for approx. $40,000.00 and at time of death is worth 250,000.00. Will are selling immediately? The whole estate is worth approx. including RRSP, bonds, etc., and the house is approx. $400,000.00. My dilemma is our we (children) going to loose 50% capital gains tax on this inhertance?
To probate the will it is costing approx. 6,000.00 and this has nothing to do with
Capital Gains, right?
@ Brenda:
A capital gain is the difference between what someone paid and what someone received for a particular item. In most cases, 1/2 of this gain is taxable.
The gain on the house is $210,000 and is NOT taxable.
The full amount of the RRSPs and RRIFs IS 100% taxable. Any other investments are taxed on their gains.
If the estate is worth $400,000 and consists of the home worth $250,000 with a cost base of $40,000, and say $125,000 RRSP and $25,000 of bonds with a cost base of $20,000, the taxable income of the deceased is:
RRSP: $125,000, plus
Bonds: $2,500 [($25,000 - $20,000) divided by 2]
Total: $127,500
The tax on $127,000 in Ontario would be just under $40,000.
This $40,000 would be charged to your mother as of her date of death.
There will be a second tax bill for gains or losses after death.
Carrying on the above example, the estate of your mother is deemed to have acquired:
The house at $250,000 and the RRSPs and bonds worth $150,000. Of you sell the house for $260,000 and the investments in bonds and from the RRSP for $160,000 (which is no longer tax free), the estate will have a capital gain of:
House: $260,000 – $250,000 = $10,000 <– ½ is now taxable
Investments: $160,000 – $150,000 = $10,000 <– ½ is taxable
Total TAXABLE Capital Gain: $10,000 = ($20,000 divided by 2).
The tax bill would be: $4,210.
You will be required to pay the final tax bill of $40,000 and the estate’s tax bill of $4,210 from the estate proceeds:
The proceeds from the sale of the home and other assets was $260,000 + $160,000 = $420,000
Less the taxes $44,210
Less Probate $6,000
Net value = $369,790. This is the amount that may be distributed after you get clearance from the CRA.
I own a condo that my father helped me obtain by being the guarantor on my mortgage. Both my father and I are on title of the condo and mortgage but the condo is my principal residence and I soley pay for all costs associated with the condo (mortage, tax, condo fees, utilities, etc). I want to sell the condo but my father would be taxed capital gains right? What would happen if I removed him from title and then sold the condo?
@ Kristin:
It would appear that you are the beneficial owner of the condo and not your father and thus he would not be subject to income tax on the disposition. From my perspective there is no need to remove him from the title nor worry about the tax consequences.
Keep in mind that leagally I cannot give you tax advice in this forum and if you are seeking piece of mind, consider asking a paid accountant to render an opinion.
Dear Tax Guy,
Lately I bought a living trust kit and prepared a living trust by myself. Now I have two major concerns:
1. If I re-title our house(principal residence) to the trust, now as the trust is going to own the house (but we are the grantors and trustees), will it still be counted as our principle residence and avoid capital gain tax until the date of our death?
2. I read your articles concerning about the trust, I am confused about the income of the trust. If we list the trust as the beneficiary of our Life insurance, will the proceeds of the Life insurance be counted as the income of the trust and subjected to income tax? If that is the case, do I need to apply a tax ID for the trust?
Thanks for the help!
@ Amy:
It is difficult for me to say for certain what the implications are. However, generally, transferring the title of the home to a trust will
mean that the trust is the owner. There are no immediate tax consequences for you at the time of transfer but the trust itself cannot claim the principal residence exclusion. Therefore, upon death there may be a capital gain based on the value at the time of transfer and the time of death.
Life insurance proceeds are not taxable provided the premiums were not paid by an employer. So those proceeds when paid to the trust would not be taxable. Any investment income earned after investing the proceeds would be taxable in the trust at the top marginal bracket.
I should point out that trust laws and the tax implications are very complex and living trust kits should only be used with only with the advice and direction of a lawyer competent in such matters. My personal opinion is that do it yourself wills and other types of estate planning kits should be avoided since they can result in unintended consequences.
My father passed away last year and my mother is selling their place and moving into a condo. It has been suggested that one of us (3 children) get our name on the title of her new place. If I do this, do I understand correctly that this will avoid probate fees on the condo and that the only capital gain that will be realized is the difference between the value of the condo at the time of her death and the selling price?
For example, (scenario 1) If the condo is bought for $170,000 and is assessed a value of $250,000 at the time of her death and is later sold for $275,000 and my name is on the title, the only capital gains to be paid would be on $25,000 (the difference between the assessed value and the selling price)?
(scenario 2) If my name is NOT on the title and the condo is bought for $170,000 and after my mom passes away , the condo is sold for $275,00, the capital gains will need to be paid on $105,000? Plus will there need to be a probate fee on the $250,000 assesses value?
If the ownership is joint, and you have your own principal residence “you” will have a taxable capital gain (not mom) on your mothers death. The gain would be in proportion to your interest, which would be 1/2.
I would NOT suggest this arrangement for probate and other reasons. These arrangements are challenged in court frequently.
I would suggest speaking with a Will & Estate lawyer first (not a real estate lawyer) before doing this. Chances are he or she will talk you out of it.
Dear Tax Guy,
My mother died in 2007 in USA and father died in 2005 in UK. I have just discovered that my parents had a bank account in Canada. The last statement (2005) showed about $120,000.00 and that it is auto-renewable short term money market account at the local bank. They had no other tangible assets in Canada or UK. After retiring my parents used to live with any of their 6 children in either UK or US. Parents were Canadian Citizens as am I, but I work in USA. I informed my siblings of this, we are now wondering what the tax implications are and how to go on about this.
Please comment, Thanks
Hello jay,
The account is Canada would probably have been a non-resident bank account. The interest earned on the money would have been subject to non-resident withholding tax before it was paid to the account. The executor should contact the bank and ask their requirements to close the account.
There would be no other Canadian tax issues.
If some friends and I incorporate a small business and we sell some land through that company does a corporation receive the same capitol gains exemption as a citizen does?
From past experience I paid tax on fifty percent of the value of the capitol gain.
Thank you for your response.
Dennis,
Yes the corporation receives the same 50% inclusion as an individual. However, a corporation is subject to different tax rates.
Acquiring land and disposing of it through a corporation generally results in tax rates in excess of the top personal marginal rate unless the corporation employees more than 5 full time employees.
You would all be better off acquiring the land through a partnership with a partnership agreement.