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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{ 46 comments }

arnold May 22, 2009 at 10:37 am

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?

Tax Guy May 25, 2009 at 8:56 am

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.

Brenda Manger July 13, 2009 at 4:44 pm

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.

Tax Guy July 13, 2009 at 7:19 pm

@ 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,

Brenda Manger July 14, 2009 at 9:50 am

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?

Tax Guy July 14, 2009 at 2:01 pm

@ 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.

Kristin August 24, 2009 at 8:06 am

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?

Tax Guy August 24, 2009 at 10:30 am

@ 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.

Amy August 27, 2009 at 1:59 pm

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!

Tax Guy August 31, 2009 at 8:27 am

@ 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.

Gordon May 28, 2010 at 4:25 pm

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?

Tax Guy May 30, 2010 at 2:34 pm

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.

interested reader January 27, 2011 at 8:36 pm

I would agree that somehow getting the property into the hands of children before mother dies would make the distribution of monies in the will less complicated (from our experience). I think (my opinion) that when there are more children than one, anyone who “gets the house” should be paying out to the other siblings their portion of the inheritance, which can mean that the sibling who gets the house, sells their principal residence and moves in to the mother’s condo, and pays out to the siblings the agreed upon amounts. Very complicated to figure out. When one tries to think about avoiding paying probate fees in the future, one has to really be a smart cookie.

Tax Guy January 28, 2011 at 1:21 pm

Estate equalization is difficult in many circumstances. If the estate value is high enough for one child to receive the house and the other to receive other assets and still fair is difficult.

Jay June 21, 2010 at 1:46 pm

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

Tax Guy June 23, 2010 at 3:47 pm

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.

Dennis T August 16, 2010 at 5:16 pm

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.

Tax Guy August 17, 2010 at 10:20 am

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.

Henry September 28, 2010 at 4:32 pm

I am POA for my father, and am selling his house (purchase price was $330k, selling price is $415k)
He is in the ICU now and may pass before the house closes next month. …as POA I was planning to distribute the funds among his children, but, what happens if he passes on before the closing date??

Thanks,

Tax Guy September 29, 2010 at 9:17 am

Henry,

As the power of attorney, you have a duty to preserve the assets for your father and not for his children. Although it is unlikely anyone would stop you from distributing the assets, I would caution you that if someone felt they were unfairly treated by your actions you may be personally liable for any actions you take.

You must also be very careful not to make the estate insolvent. If creditors are owed or taxes due, you may be liable personally for these.

I would suggest you speak with a lawyer before distributing any assets.

If your father passes away, then your ability to act as the Power of Attorney ceases and the executor then becomes responsible for the house sale.

Henry September 29, 2010 at 10:07 am

I am also the executor. (and one of the children)
We have no outstanding debts, and do still have a great deal of funds in the estate other than the house

John November 18, 2010 at 11:37 pm

Tax guy,

My dads own a revenue property in which he occupies the residential living space. The revenue portion is made up of two commercial units. There is still a mortgage on the property. Since he is reaching a stage in his life where his health is deteriorating I was seeking some tax advice.
First what are the children s taxable implications on this property if he were to pass away.
Second, is there any way of reducing/delaying/deferring or minimizing any taxes.

Thanking you in advance.

J

Tax Guy November 22, 2010 at 9:24 am

The situation you describe can be a little complex and a well though out estate plan should be in place. I would urge your father to take a full inventory of his assets and their value and then meet with an estate lawyer to make sure everything is addressed.

When you father passes away, he is considered under tax law to have sold all of his property at its fair market value. Any accumulated gains on the property will be realized on his final tax return for tax purposes. This means the gain on the commercial units would be taxable capital gains (or losses) in his hands.

From the date of death forward, the estate will be responsible for any accumulated gains “realized.” If property is distributed to the children in-kind, the gift is deemed to have been given at the value as of the date-of-death. This means that the beneficiary would be responsible for any gains or losses from the date-of-death forward.

If your father were to sell the property prior to his passing, the gains would be realized at that time and taxable in that year. The only ways to defer the gain would be to transfer ownership to a spouse or if he self-financed the sale (i.e. he sell the property to the buyer and the buyer pays him over a period of years).

John November 22, 2010 at 11:11 am

Thank you! I will seek professional advice. One other question. If for example the building is worth 400K and was purchased for 160k making a capital gain of 240k. Would the mortgage(100k) reduce this gain further?

Tax Guy November 22, 2010 at 12:05 pm

The calculation of the capital gain is correct but only 1/2 of the gain is included in income and is taxable.

Capital cost allowance (CCA) can also have other tax consequences (terminal loss or a recapture) depending on the actual final sale amount and the balance of the UCC pool.

The mortgage will have no impact on either of the above trnasactions.

John November 22, 2010 at 11:23 am

Tax Guy

One further question…my dad had a incorporated business which went bankrupt and incurred losses. Can these losses be used to offset the capital gains from this property?

Tax Guy November 22, 2010 at 12:01 pm

Depending on the circumstances, he may be able to claim the loss on the business as an allowable business investment loss. This is a special type of capital loss that can be used against any income and not just capital gains.

John November 22, 2010 at 4:28 pm

Thank you Tax Guy for all the clarification. One other topic, I was looking at my dad’s returns and his accountant only claims 33% for personal portion when calculating rental income. I would think 50% is more appropriate since he uses 50 % of the total sq feet for his residence. @ 1400 sq ft for living and the same footage is rented out. any thoughts?

Tax Guy November 24, 2010 at 10:49 am

The basis should be reasonable given the circumstances. The principal residence only includes the adjacent land up to one half hectare. The land may be a factor that changes the allocation.

A discussion with the accountant should resolve the question.

John November 24, 2010 at 7:52 pm

Tax Guy,
I have been doing some research into CCA. Building was purchased in 1981. How would the CCA work on the building. the half year rule I believe does not apply. correct? My dad’s accountant never did this but if it can reduce rental income why not take advantage of it? Can you provide a quick example with the following info: building 150k(purchase price) and the rental income after expenses is 10K.

Tax Guy November 25, 2010 at 11:25 am

John:

Minimizing taxes is not always the objective and there are many reasons why it might make sense to have a higher taxable income or to not claim CCA on a property. A couple of situations where CCA might not be claimed would include having higher taxable income to create RRSP contribution room, existing rental expenses had reduced income to nil (CCA cannot be used to create a rental loss), or if the property was a partial principal residence – to avoid future capital gains.

That being said, you may be able to go back and file amended tax returns for prior years. The CRA will only consider requests for the 10 prior years so anything pre-2000 will not be considered.

Also, the claiming of CCA may result in a recapture upon the deemed sale at death which could impact or eliminate any benefit.

The building acquired pre-1988 is class 3 and subject to a 5% CCA rate. The half-year rule would have applied only in 1981.

For 2000, the claim would be $7,500 (2.5% of $150,000)
2001 – $7,125 (5% of $142,500)
2002 – $6,768 (5% of $135,375)

You have to consider all impacts of claiming the expense after-the-fact.

John November 25, 2010 at 12:25 pm

Thank you for the clarification and calculation. So because this being used as a partial residence no CCA can be claimed?

Tax Guy November 25, 2010 at 3:22 pm

John,

There is an election that allows a partial conversion of the principal residence to a rental property and continue to claim the property as a principal residence. If CCA were claimed, this deferral would be denied and a partial capital gain may be realized.

Now this may or may not be a problem. The tax savings from claiming the CCA may be sufficient to provide a benefit. An accountant should advise on the viability.

Alexia November 29, 2010 at 6:43 am

Hey Tax Guy!
I’ve read your blog and am thoroughly impressed!
I am currently working on a school case study for my personal finance class at Concordia and was wondering if you could assist me with a question specifically on capital gains taxes at death. Here is the question:
When Rob dies, can his assets pass to Ellen without triggering a capital gain? Is this tax treatment different compared to the tax consequences that would result from Ellen’s death at a later date?
(Rob and Ellen are a hypothetical couple, Rob owns several RRSPs and other assets.)
I have answered the first part of the question saying that a way to defer the taxes on his own assets would be to leave his assets to his surviving spouse or spousal trust. Following Ellen’s death, is there any way in which Ellen could once again defer the tax by delegating assets to their children or grandchildren through a TFSA or anything else?

Thank you for your help, my case is due wednesday, so perhaps if you’d like you can help me out with some other questions as well.

Alexia 🙂

Tax Guy November 30, 2010 at 10:44 am

If Rob and Ellen relationship meets the definitions of spouse or common law relationship, then upon the death f one spouse, the assets will rollover to the surviving spouse at the original adjusted cost base. This can be done directly or through a spousal trust.

Further deferral would only be possible if the surviving spouse remarried but this would cause other, non tax issues such as disinheriting children.

Alexia November 30, 2010 at 11:51 am

Thank you so much for your time and swift response!

Daine K. December 4, 2010 at 3:47 pm

Very interesting blog.
I have joint ownership with my ex-wife of a house in B.C. that she and my youngest adult son reside in. We are considering turning over ownership of the house to our two sons before either of us dies. My wife is presently 86 years old and I am somewhat younger.
What are the present and future tax implications of this?
I am a Canadian Citizen but reside in the U.S.A.

Tax Guy December 6, 2010 at 9:01 am

There are a few considerations. If your ex-wife predeceases you, then you will automatically become the full owner of the home in Canada.

If you remove your name from the property, you may be deemed to have disposed of your interest in the property and may have a disposition to taxable Canadian property. This would result in Canadian income tax and possible US income tax as well.

You should probably seek the assistance of an international tax and estate planning specialist to avoid any complications.

G Fowler December 4, 2010 at 8:19 pm

Hello:

My father (widower) is currently living in his lifelong primary residence but due to Alzheimers, may need to transfer into nursing care sometime in 2011. Prior to my mother’s death last year, she transferred to nursing care but we retained my father’s address for her CRA dealings, which they allowed. Once he is transfered into residential nursing care, will his house immediately be considered as not his primary residence any longer, and trigger Capital Gains tax if sold before his death? And would the gain only be based on the time it was not his primary residence?

Or, (I am his POA) if I sold it within the same calendar year, would he be exempt from the tax since he lived in it for part of that year?

Thanks for your help!

Tax Guy December 6, 2010 at 9:10 am

When your father will no longer permanently reside in the home, the principal residence exemption would no longer be available from the point he left his home.

Any capital gains would accrue from the date he no longer was ordinarily resident to the point the home was sold. If you sell the house in the same tax year he enters the nursing home, then the principal residence exemption can be used.

You might also want to read through the Nursing Home and Principal Residence article.

G Fowler December 23, 2010 at 8:10 am

Thank you for your response – one other question. In the article you quote, above you mention that if another family member occupied the home for a period of time, the exemption may still qualify as the principal residence. My adult brother (independent) has been living onsite with my dad for over a year, and this is his primary residence – he owns no other property. As he will continue to live onsite once my dad moves into care, and until we decide to sell the house, would this be a case where the home would still qualify as principal residence, and the exemption eligibility remain intact until sale?

Thanks again for your assistance!

Tax Guy December 23, 2010 at 8:52 am

Your brother occupying the house would preserve the exemption because it is ordinarily occupied by someone who does not own a home.

Daine Kelman December 6, 2010 at 12:30 pm

Thank you for you reply to my question. It was very informative.

John December 7, 2010 at 8:20 pm

Tax guy,

If i wanted to verify if my dad used the lifetime capital exemption how can i do this? thank you

John December 7, 2010 at 8:21 pm

“Lifetime capital gain exemption”

Tax Guy December 8, 2010 at 11:23 am

@John
Contact the CRA

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