- Canadian Tax Resource Blog - http://blog.taxresource.ca -

Capital Gains In An Estate

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.