The passing of a loved one comes with an exhausting rollercoaster of emotions as well as the requirement to settle their affairs – including any real estate that they may have owned.
Real estate that is inherited is typically bequeathed to a beneficiary in a will. When there is no disclosed beneficiary, one will be assigned through probate.
How is property inherited?
In Canada, most estates have to go through probate (yes, even those with a will) to either validate a will or choice of executor. Any probate can be contested on reasonable grounds. Probate can last between three months and a year, if it is contested it can last even longer. Estates with a complete and up-to-date will which go untested will get through the probate process the quickest, so having a will set up is important for your loved ones. While not required, it is encouraged to hire a lawyer to guide you through the probate process.
Is there a way for real estate not to have to go through probate?
If property is being passed from a deceased spouse to a surviving spouse, it is possible for probate to be avoided. Real estate assets that are held in in a joint tenancy title (as is typical for a married couple) do not require probate and will automatically pass to the surviving party and they become the sole owner.
What is inheritance tax in Canada?
Fortunately, Canada does not apply an inheritance tax to a beneficiary of an estate. Instead, the estate is charged any taxes (such as capital gains and income tax) before assets can be passed into the hands of the persons inheriting. Therefore, the tax has already been paid by the time it’s in the beneficiary’s hands.
If you are inheriting a property that was a principal place of residence, the estate will pay capital gains tax. The beneficiary will then be responsible for any capital gains upon the sale of the property after it is inherited. For example, if an individual inherits a house that had a deemed fair market value of $500,000 five years ago at the time of the deceased’s death and is now being sold for $750,000, then the beneficiary will be responsible for tax on the $250,000 of capital gain.
What happens if I keep and move into the property?
Primary residences of a deceased party that are then inherited are automatically considered the beneficiary’s primary residence as well. If you move into the home and keep it as your primary residence, you would become responsible for all costs associated with the property. This means property taxes, repair costs, utility costs, insurance etc.
If you inherit a holiday home, then that property will be considered a secondary home, which you only live in a few months out of the year. Transfer tax may be applied on secondary homes, so it’s important to engage a tax professional.
Will I be charged taxes if I choose to rent out the property?
If a property that was once a primary residence is inherited and then gets rented out, you are changing the property type to an investment property. In this situation, you will have to pay capital gains on the difference of the property’s fair market value from the time of inheritance and the time that it is rented. If you rent out the property directly, this amount should be minimal.
How can I avoid paying taxes on an inherited property?
The best way to avoid paying taxes on real estate is through detailed estate planning, which needs to be done before a party dies. Once someone has passed, your options are very limited. Therefore, if it is possible, it’s best to plan ahead. An experienced estate planning solicitor will guide you and your loved ones.
There are several strategies including trusts, gifting and joint tenancy arrangements that can help families minimise tax obligations upon the death of a loved one, however, these need to be planned for while the individual is alive. If you have real estate or other assets, it’s never too early to start your estate planning.
The Mikhailitchenko Law Office is dedicated to protecting both you and your family’s assets. Our knowledgeable and experienced team can help navigate you through the sensitive process of planning your estate as well as through the probate process. Contact us today to learn more about what we offer and how we can help you.
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