Capital Gains On The Principal Residence After Death

by Tax Guy - Burlington Accountant on February 20, 2011 Print This Post Print This Post

A visitor to the Canadian Tax Resource Blog wrote in asking a rather interesting question about how an estate was taxed on the capital gain from the sale of the deceased’s principal residence.

The visitor was the executor of an estate where the deceased’s principal residence was included in the assets of the estate. At no point during the life of the deceased was the property rented nor was it ever used for anything but the deceased’s principal residence. However, the CRA has reassessed the estate and determined that there is a taxable capital gain on the difference between the date of death and the subsequent sale date.

When The Principal Residence Exemption Applies

When a taxpayer dies their principal residence is deemed to have been sold at the date of death. The estate of the deceased therefore acquires the property at the property’s value at the date of death. The deceased is entitled to claim the principal residence exemption up to the date of death.

If the terms of the Will leaves the property to an adult child who does not have a principal residence for tax purposes, then the beneficiary may claim the principal residence exemption from the date of death forward.

If the property is sold outright to an outside party then a taxable capital gain or loss will be incurred based on the value of the property as of the date of death and the subsequent sale date.

In order to maximize the principal residence exemption, you should leave your principal residence to a beneficiary who will be eligible to claim the principal residence exemption. This means you will have to leave the property to an adult child who does not own their own home.

Contact me to find out how I can help you file the final tax returns for an estate and minimize taxes by taking advantage of all tax planning opportunities.

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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{ 16 comments }

Bonnie K August 22, 2010 at 7:36 pm

If a spouse dies & the house is in his name only ,what rights does the wife have?SHE IS THE BENEFICIARY.

Tax Guy August 23, 2010 at 1:50 pm

Bonnie K,

If the husband had a Will and left everything to his wife, then she is entitled to the property. If there was no Will, then the laws of intestacy apply: Normally, this entitled to the spouse to the family home and a division of the remaining assets.

Nicole March 1, 2012 at 5:00 pm

Could you please answer a question in regards to inheritance tax or capital gains owing, if the house is in the deceased name, what is the entitlement of the spouse who is the sole beneficiary? This is a primary residence.

Thank you

Tax Guy March 2, 2012 at 2:21 pm

Any property left to the spouse can be transferred without tax. If there was no will, then the entitlement to the deceased property is under provincial law and this does not necessarily means the spouse gets an equal share.

Betty March 16, 2012 at 11:35 pm

If a person dies intestate, and there are two homes, one principal residence, the other rented (but held in trust by a relative),both homes take about ten months to sell, does capital gains apply to both homes..thank you for your time

Tax Guy March 17, 2012 at 2:25 pm

Betty,
When a person dies they are deemed to have sold the properties on the date of death. The princiapl residence exemption can only be claimed up to the date of death. From the date of death forward, the estate may have gains or losses on both properties (the cost base is the value as of the date of death).

Terry March 26, 2012 at 12:04 pm

Could you please assist me with 2 pieces of information?
My deceased sister’s home is to be sold and the proceeds to be split between 3 children. There is a trust set up. The home had a major freeze up and incurred substantial damage neat $100,000. If this expense is used in the estate summary it will cause a loss to the estate. Question 1: Can this be considered a capital loss and used to offset other taxable fund/income to the estate? Question 2: Can any excess loss of the estate be transferred to my sister’s personal tax return and claimed there?

Tax Guy March 26, 2012 at 6:15 pm

Hi Terry,
It’s difficult for me to answer this question in this forum but I say losses cannot be transferred to beneficiaries.

Tax planning options ARE available but they are highly complex. You’d best contact me to discuss how I can help.

Diane October 1, 2012 at 9:44 am

When a parent dies and leaves the house to 3 sons in his Will – one in New Brunswick (owns a house), one in Ottawa (owns a house) and one in Toronto (resides with parent), at the time of father’s death will the children pay estate tax on the value of house? If they have no plans to sell it (Toronto son planning to live in it) …is it best to put all three names on the property that they joint own? or an agreement be made between 3 sons honoring the father’s wishes of house split? When the house is sold, will the 3 children need to pay tax on money received?

Tax Guy - Burlington Accountant October 1, 2012 at 8:46 pm

Hi Diane,

Joint ownership is not a good idea. See this article: http://blog.taxresource.ca/the-benefits-and-dangers-of-joint-accounts/

The same applies to joint ownership of real property. Also, the “agreement” would likely serve to confirm the ownership wasn’t truly joint.

There is no estate tax and no inheritance tax in Canada. There is no tax on the gain on a principal residence and the probate fees in all provinces are not must in most provinces.

My suggestion is to not worry about this.

John Bosyj bosyj February 3, 2013 at 6:50 pm

Regarding Diane’s question Oct 1, 2012, will the children need to pay capital gains tax of the money they receive, or does the estate pay the capital gain when the house is sold?

Burlington Accountant February 4, 2013 at 12:39 pm

The deceased pays the tax on their share.

Kris M March 20, 2013 at 8:43 pm

Hi
My father wants to leave a cottage in a Will to his grandchildren my 2 kids and 1 my sisters. What is the best way to do that without paying a lot of tax?

Thanks, Kris

Angelina April 29, 2013 at 11:24 am

If I own the principal residence (my name only), which I bought before the marriage. When I die and have will, can I leave this to my mother instead of my spouse? Thanks.

Angelina May 3, 2013 at 7:58 am

What is the tax consequence if I want to give my husband to have a life estate of this property? Thanks.

Tax Guy - Burlington Accountant May 3, 2013 at 9:07 am

Hi Angela,
What you should consider is a modification to your Will to create a spousal trust where property (real estate and possibly other assets) are put into a trust where your husband has use of the assets for his life. On his passing, the assets are then distributed to any other beneficaries.

If you are legally married the assets can pass to the trust on a tax-deferred rollover with some exceptions – i.e. RRSP’s.

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