Capital Gains In An Estate

by Tax Guy - Burlington Accountant on February 4, 2009 Print This Post Print This Post

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.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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{ 75 comments }

Daine December 10, 2010 at 8:17 pm

I previously asked a question to which you replied on Dec. 4th.
I am planning to transfer my half interest in the B.C. property to my ex-wife without any financial interest or reward. She will then become the full owner of the property.

Tax Guy December 13, 2010 at 10:24 am

The transaction would be deemed, for Canadian purposes, to have occurred at fair market value. There may still be a gain on the accrued gain.

Lee January 8, 2011 at 5:10 pm

Tax guy,

I’ve learned a lot from your reader responses. Thank you.

Can you tell me what the tax consequences are for Canadians who inherite cash, property or securities from non Canadian residents from a foreign country that is not the united states?

Thanks.

Tax Guy January 9, 2011 at 8:18 am

Hello Lee,
The inheritance would be tax free.

DP January 24, 2011 at 12:36 am

could you please send me your contact information as i have a detailed question i would like to ask you

DP

John February 5, 2011 at 4:42 pm

Tax Guy,

Can I add the commissions I pay on my stock trades to the ACB?

Tax Guy February 7, 2011 at 7:53 am

John,
Commissions on purchases are always added to the cost base and deducted from the proceeds of any sale.

Kate February 6, 2011 at 6:16 pm

Hi Tax Giuy,

Sorry for responding to such an old thread.
I’m having a hard time figuring out the capital gains on the primary residence of my mother.
For instance, as the sole beneficiary of her estate, if she leaves her house to me and I decided to keep it as a secondary residence (I already have a principal residence), does the estate pay capital gains? I am aware that I would pay capital gains myself if/when I sell the secondary residence but I’m unclear if the capital gains are also paid by the estate.
Best regards.

Tax Guy February 7, 2011 at 8:16 am

Kate,
It is important to understand the timing of events for tax purposes. The deceased is deemed to have sold worldwide assets at fair market value immediately before death. If, at the time of death, the home was the principal residence of the deceased, then the principal residence exemption applies on the deceased’s final tax return.

The estate is deemed to have acquired the property at fair market value immediately following death. If the estate sells the home, then there can be a capital gain if the proceeds of the sale less any fees and commissions (net proceeds) exceed the fair market value at the time of death. The estate would be responsible for this tax and would have to file a T3 tax return.

On the other hand, if the estate transfers the property to a beneficiary, the beneficiary is deemed to have acquired the property at the fair market value as of the date of death. If the beneficiary already has a principal residence and sells the property, then the beneficiary will be liable for any tax consequences. The beneficiary may be able to use the principal residence exemption if they or their immediate family “ordinarily occupied” the property. But this is a little more complex.

John February 12, 2011 at 11:38 am

Tax guy,

I recently started a small consulting contract. I am self employed and not incorporated. Would i be able to deduct my lunch meals?

Tax Guy February 13, 2011 at 7:56 am

John,
A business can deduct expenses if the expense incurred was for the purposes of gaining or producing income. Advertising and promotion is an example. A meals is deductible at 1/2 the rate if it was used for entertaining clients or vendors.

John February 12, 2011 at 1:46 pm

Tax Guy,

My dad goes to the hospital on a daily basis. Can i deduct the parking on his tax returns?

Tax Guy February 13, 2011 at 8:05 am

John,

Generally not. But as always there may be some exceptions.

If medical treatment is not available to your father within 40km he, or his attendant, may be able to claim the cost of public transportation and if PT is not available, then motor vehicle expenses can be claimed.

You may be able to claim travel expenses if, a medical practitioner certifies, in writing, that your father cannot travel on his own.

See the CRA’s information on Medical Expenses. Refer to travel & attendant care.

John February 13, 2011 at 11:06 pm

Thanks tax guy.

On the topic of meals and entertainment… someone mentioned to me that i can only claim up to a max of 1% of my sales for m & e. is this true?
Thanks again for all your help!

Tax Guy February 14, 2011 at 10:45 am

Meals and expenses are restricted to those for entertaining clients unless you have been required to travel out-of-town for more than 12 hours: In this case you can claim person meals.

All meals and entertainment are restricted to 50% of the actual expense and the maximum deduction is limited to the commissions you received.

J February 15, 2011 at 9:28 pm

Tax Guy:
I’m really impressed with your blog and the depth of information here!

I am administering an estate (wife is Executor for her Aunt, passed in 2008) and we are now getting to closing part of Revenue Canada Clearance Certificate process. Final piece is her non-registered investments.

I understand that deemed disposition on date of death takes place and all investments pass to the Trust. I am not clear on the process to determine valuation for tax purposes of the capital gain on the non-registered portfolio.

We are using the adjusted cost base (ACB) to determine the capital gain, but throughout the years, taxes were paid (when she was alive) through her T1 on the incremental gains.
If this is the case, why would we have to determine the total gain and have the trust pay tax on that?
Thanks so much for your feedback!

Tax Guy February 16, 2011 at 4:57 pm

The deceased pays the tax on the accrued gains to the date of death. Capital gains are only taxable when realized. They are not taxed on an accrued basis.

The cost base of a security is its price plus commissions paid. The average cost per share is the total cost plus commissions, divided by the number of shares on hand immediately before the sale.

The estate is deemed to have acquired the property at FMV immediately after death. It’s cost for the purposes of the T3 return is the value of the securites as of the date of death. The trust then pays tax on the gain from the date of death forward.

Does this help?

J February 16, 2011 at 7:59 pm

Definitely!

Only question- without getting into the specifics of mutual funds, she got T-slips from the funds over the years with a Taxable amount for Capital Gains (I assume as a result of the funds realization of gains through stock sales).

Would the total gains of the portfolio (at the date of death) then take into account the taxes paid over the life of the funds?

Thanks again for the great info!

J

Tax Guy February 16, 2011 at 10:22 pm

The cost base of the fund is its original cost, plus commissions, less and return of capital, less any ACB of previously sold units

The gains distributed by the fund do not affect the gains or losses from selling the fund. In other words, the fund holds stocks and bonds and it sells them to meet redemptions or for portfolio rebalancing. The gains are distributed to the unit holders and taxable to the unit holder when received. These distributions affect the value of the units, but do not affect its adjusted cost base.

John March 1, 2011 at 11:59 pm

Tax Guy,
I am using turbo tax. In the receipt section under property there are lines for municipal and school taxes. How much will this decrease my taxes? is there a threshold for household income and is there a threshold for amount of municipal taxes?

Tax Guy March 2, 2011 at 10:08 am

It depends on whether its a tax credit or deduction.

John March 5, 2011 at 1:11 pm

can you explain the difference?

Tax Guy March 5, 2011 at 3:40 pm
CT March 16, 2011 at 9:33 pm

Tax Guy, great information, thanks, I learned a lot, but still a little unsure of some things and have some questions.

Mother is the named beneficiary/executor. Father passed away last year and we’re concerned about the capital gains.
There are 2 rental properties in his name and a Joint is principle residence.
Another property is joint with mother, and has a mortgage, but was meant to be sister’s and done to avoid claims from a divorce.
There is no intention to sell the properties.

Does that mean the 2 rental properties will be taxed to father’s final return up to date of death using original purchase price as the cost base?
And mother does not need to claim tax yet? And when she does sell, the base cost would be from the value as of date of death?

For the joint resident residing as primary resident of sister…does that mean since there is already a primary resident, this property is still subject to capital gain for father’s half?

Tax Guy March 17, 2011 at 9:00 am

CT,
There is a tax deferred rollover when the spouse is the beneficiary under a Will or on a registered plan or if property was held in joint ownership with a right of survivorship.

CT March 16, 2011 at 9:37 pm

Another question, for rental properties, if mother is owner and all maintenance, repairs and operations is managed by daughter, can daughter claim the expenses such as fuel and labour? Will that be considered a Property manager expense for mother?

Thanks.

Tax Guy March 17, 2011 at 9:02 am

Expenses cannot be transferred to another taxpayer.

The daughter is an employee and is entitled to a salary or wage. This is a deduction from rental income. If the daughter incurs expenses on behalf of the mother for the rental property, your mother can reimburse her directly for the expenses and then mom can claim them. Alternatively, the daughter can deduct them only if mom will not reimburse. In this case the T2200 must be completed.

larry April 4, 2013 at 6:25 pm

hi tax guy,

My father has been diagnosed with a terminal disease and has only a few months left. He has made me his only heir and executor. As I am a non-resident Canadian(living in Malaysia) what are my tax implications and estate planning options at this time to reduce tax consequences. He only has his RRSP, bank accounts and his own house.

Thxs.

Tax Guy - Burlington Accountant April 5, 2013 at 10:27 am

Hi Larry,

You may have a number of issues settling the estate if you are a non-resident.

Your father estate would still be required to file and pay the final tax owing at death (on the RRSP’s and any other taxabale property). You may also have some legal issues aound obtaining probate and selling the house and dealing with the RRSP’s (probate would be required to sell the house and you need to discuss with a lawyer as there may be complications from you being non-resident).

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