Following is a question recently submitted concerning the efficient transfer of property on or before death.
My mother is a widow and her house is in her name only. She is in poor health and is concerned about taxation on the house after her death. Her sons are beneficiaries. She wonders weather she should transfer the house ownership to her sons before or after her death. What are tax implications if she transfers the house both before and after her death? Which is to her advantage?
To summarize the facts:
- Your mother is a widow and owns a house
- She would like to transfer ownership to her 2 sons before in the most tax efficient manner possible
When a resident of Canada passes away, they are deemed to have sold all of their assets the moment before they passed away. As a result any income earned up to the point of death is subject to tax in the same manner as an individual. Similarly, if a personal gives away a capital asset, they are deemed to have sold that asset and the taxes on any income earned will be due.
There is a general exclusion from tax on gains resulting from the sale or disposition of a principle residence. That is to say, if you have a principle residence, you can sell the home (or pass away, or give away the home) and not incur any tax consequences.
To facilitate the transfer she may either transfer ownership in full now without tax consequences or make the ownership joint with the sons with rights of survivorship. Both of these options have some risk both to the mother and the sons. In the full ownership transfer, the mother loses title and control over the property. The son may do as they wish with the property. In both the full transfer and joint ownership alternatives, if either of the sons has financial difficulty or is subject to divorce proceedings, then the home would be subject to those proceedings and may be sold by the court to satisfy the creditors or the terms of the divorce.
The divorce and creditor issues aside, if the sons already own a home that qualifies for the principal residence exclusion, the transfer of ownership (joint or full) would jeopardize their exclusion.
Your mother may set-up an inter-vivos trust with the sons as beneficiaries. Upon her death, the home automatically transfers directly to the sons and bypasses probate. If she has other assets that earn income, it is not advisable to place them in the trust as they would be subject to the highest marginal tax rate (around 45%) for every dollar earned. You would need to talk to an estate lawyer about whether it was worth establishing a trust or simply naming the sons as beneficiaries under the will and applying for probate.