Question: My Father in Law and his mother own a piece of lake front property in Canada 50/50. The property was inherited by his mother and at that time she paid a substantial amount in tax to keep the property. His mother now is ill and we are concerned about taxes if she were to pass away. If they are 50/50 owners at the time of her death, what do we need to be prepared for regarding Canadian tax. After she passes what is the best way to structure ownership between my father in law and his four children to minimize taxes and maximize transfer efficiency. How is the tax calculated when it passes from generation to generation currently in Canada. My father in law and his mother are both non-residents of Canada.
A follow-up query provided the following additional information:
1. What year did your father in laws’ mother inherit the property?
2. How and when did your father in law become part owner? Did he inherit at the same time as his mother or was he added as an owner later? If he was added as owner later was it a gift or a purchase? If the property was a gift what was the intention (avoid probate, convenience, intention to gift whole property).
In 1990 my father in law was added to the deed. It was done later (1990) because his mother had been 50/50 owner with another party and in January of 1990 the other party died and my father in law was added. We think it was considered a gift because he didn’t have to pony up any money at the time he was added. The addition of my father in law in 1990 caused tax in the amount of approx. $30,000.
3. Is the ownership joint with rights of survivorship or tenants in common or another form of ownership?
The ownership now is JTWROS between my father in Law and His mother’s Revocable Living Trust. (My Father in law has his own Revocable Living Trust, so it could be changed as the part-owner of the property, if that makes sense.)
JTWROS is an acronym for “joint ownership with rights of survivorship.” This is form of ownership whereby each owner has an interest in the property. Upon death of one of the owners, the remaining owners inherit the deceased’s interest in the property.
When a person dies owning taxable Canadian property (typically real estate and in this case the lake front property), the Canadian tax authorities (the CRA) consider the deceased to have sold all of their possessions for their fair market value right before they died. Similarly, when property is gifted to an adult child, as was the case when the ownership was partially transferred to your father in law one-half of the property is considered sold for its fair market value (regardless if actual cash changed hands or not).
What This Means…
Your father in laws’ mother will have been “deemed to have acquired” the lake front property at its fair market value 1985.
- When the ownership changed the registration to JTWROS she was “deemed” to have sold ½ of the property at its fair market value in 1990.
- One-half of any gain (the difference between the inherited value and the value at the time of the change in registration) would have been taxable in 1990.
- At the same time, your father in law would have been deemed to have acquired the property at a cost equal to ½ of the fair market value of the property in 1990.
When your father in laws’ mother passes away, the CRA will consider her to have sold the remaining half of the property to your father in law at fair market value. A capital gain would be taxable (1/2 of capital gains are taxable in Canada).
This situation poses somewhat of tricky situation. If the remaining interest is transferred to your father in law now, there would be a deemed sale and a gain would be taxable.
If you and your family were residents of Canada, you may consider establishing a trust that is created upon your father in laws death. The trust would hold the property until some future event triggers dissolution of the trust and distribution of the property to the beneficiaries.
From a U.S. perspective the situation is much more complex and is best addressed by a U.S. estate attorney.