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 apopular belief among my clients
that if they choose to own their home
in joint tenancy with another person,
they can successfully avoid paying
the taxesHowever, this is not always so,
because it depends on who the coowner
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 PURPOSESAND DOES NOT CONSTITUTE LEGAL ADVICE.
Raluca M. Soica, BBA, CPA, CMA, JDBarrister & Solicitor 647.280.6497 raluca@rms-law.ca
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Raluca M. Soica, BBA, CPA, CMA, JDBarrister & Solicitor 5/25/2022 |
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