|Estates si Real Estate Law - What happens to your real estate property when you pass away?|
Whenever clients ask me about this topic, the fast and short answer I always give is that it depends.
If you own property only in your name
If the property is not a principal residence, the Income Tax Act (“ITA”) stipulates that death triggers a “deemed realization” at fair market value of non-depreciable capital property, depreciable capital property and RRSPs. This means that the estate will have to pay tax on capital gain and estate administration tax.
However, the ITA has built in some exceptions, one of which is the outright transfer to a spouse or transfer to a qualifying spousal trust, also known as a “spousal rollover”. This means that the death of the first spouse constitutes a non-taxable event. So, if you leave all your property to your spouse outright, or in a qualifying spousal trust, you defer capital gain until the spouse either disposes of the property by sale or is deemed to dispose of the property by death.
If you do not plan to leave your assets to a spouse, the ITA offers another exemption to paying tax on capital gain, called the “principal residence exemption”. However, in this case, only one exemption per family per year can be designated. Since many cottage properties hold significantly more capital gain than city residences, and one can qualify the cottage as a principal residence, it is important to make the most use of the exemption and to shelter the highest capital gain.
If you own property in joint tenancy with somebody else
The usual structure of a property held in joint tenancy is that the surviving owner has a right of survivorship upon the death of the other. It is a popular belief among my clients that if they choose to own their home in joint tenancy with another person, they can successfully avoid paying the taxes. However, this is not always so, because it depends on who the co-owner is.
If the co-owner is their spouse, the survivor receives the property by right of survivorship, with the result that the property by-passes the will, and the estate does not pay estate administration tax. Additionally, no property tax or tax on capital gain will be payable regardless of whether the property is a principal residence or not, due to the spousal rollover exception.
However, if the co-owner is an adult child, for example, the court might not approve the transfer outside the will due to something called a “resulting trust”, where a property legally owned by a person who contributed nothing to its acquisition should go back to the person who purchased it for valid consideration. This will be considered a gratuitous transfer from the parent to an adult child, unless the adult child can provide proof that the gift was intended to them and not merely to be held in trust.
I always like to remind my potential clients that they have to consider their own personal details when planning for distribution of real estate property on death. If you have any questions about this topic, I would love to help!
PLEASE NOTE THAT THE CONTENT OF THIS BLOG IS MERELY FOR INFORMATION PURPOSES AND DOES NOT CONSTITUTE LEGAL ADVICE.
Raluca M. Soica, BBA, CPA, CMA, JD
Barrister & Solicitor
Raluca M. Soica 8/12/2020