Inheriting real estate in Canada: Do capital gains tax changes apply when you inherit property? 

Disclaimer: This article discusses estate planning.  It is intended for the purposes of providing information only and is to be used only for the purposes of guidance. This article is not intended to be relied upon as the giving of legal advice and does not purport to be exhaustive.

When it comes to estate planning, there are many decisions to make. 

What are the proposed capital gains tax changes?

One of the federal government’s changes relates to real estate. The proposed change applies to individuals and would raise the inclusion rate to 67% on capital gains above $250,000. 

What does that mean? 

The first $250,000 in capital gains would be taxed at 50% of the asset’s gain. For every dollar above $250,000, you would pay tax on 2/3 of the assets gain. 

Let’s use an example. Suppose you buy an investment property for $350,000.  Years later, you would like to sell it for $700,000. That leaves a profit of $350,000. 

Under the current regulations, the entire $350,000 is taxed at 50%, resulting in a $175,000 capital gain. 

However, under the proposed change, the first $250,000 would be taxed at 50%, while the remaining $100,000 would be taxed at the increased rate of 67%.

What does that mean if you inherit property?

It depends on whether the property was the deceased’s primary residence or not. 

If it was their primary home, then the estate does not pay capital gains tax when the property transfers. If it was a secondary residence, say a cottage, then it would be subject to capital gains tax when it transfers to the beneficiary. However, the estate would be responsible for paying that tax.

Either way, there are tax consequences when you, as the beneficiary, sell the property. It is likely subject to capital gains tax at that point.

What happens if the property value has increased in value? 

When an inherited property appreciates in value, the calculation of taxable capital gains hinges on the property’s fair market value at the time of inheritance. Put simply, the beneficiary becomes liable for capital gains tax on the difference between this fair market value and the property’s original purchase price.

For instance, let’s say Greg inherited his parents’ primary residence, which was valued at $600,000 at the time of their passing. However, his parents initially purchased the property for $150,000. Now let’s say that Greg decides to sell the home at a sale price of $700,000. 

Does Greg pay capital gains tax on the difference between what his parents paid for the home? Or does he pay based on the increase in value from when he inherited it? 

It would be the latter. Greg would be subject to capital gains tax on the $100,000 increase in value since he inherited the property.  

Is it time to look at your estate plan? Talk to Beeksma Law today!

Given the proposed changes to capital gains tax and their potential impact on property inheritance, now may be an opportune time to review and reassess your estate plan.

Consulting with tax experts and legal professionals can help you understand how these changes may affect your assets and develop strategies to minimize tax liabilities for your beneficiaries. Whether it’s updating beneficiary designations or exploring estate planning options, taking proactive steps can help ensure your assets are managed effectively. 

At Beeksma Law, we primarily practice estate law and are strategic advocates when it comes to protecting your legacy. Our team is dedicated to helping clients navigate complex legal matters related to estate planning, probate, and asset protection. With our expertise and personalized approach, we can assist you in creating a comprehensive estate plan that aligns with your goals and minimizes tax implications.

As trusted advisors in estate law, we understand the importance of proactive planning and attention to detail. With Beeksma Law by your side, you can have peace of mind knowing that your estate is in capable hands. Don’t wait until it’s too late – schedule a consultation with our team today to discuss your estate planning needs and start protecting your legacy for the future.