Can you inherit the real estate? It is definitely possible to inherit a house in Canada, and it’s not surprising that you may not be the only one inheriting property from your parents. Your anxiety and stress are multiplied when you not only try to manage the death of your loved one but also need to figure out what to do after inheriting a house in Canada. Don’t stress about inheriting real estate because we are here to provide you with the basic information that you need to know.
Let’s go over the fundamentals of inheritance laws, what an inheritance tax on property in Canada entails, and much more.
What is an Inherited Property?
Inheriting real estate means inheriting property from a parent or relative who has passed away. This situation is stressful, and you need a little help to deal with it. When you inherit a house, it can become your primary residence, which means that you can live there. It’s obvious that you don’t have to pay for the residence that’s been passed down to you.
Inheritance Tax On Property In Canada
Once you inherit a property, you may ask yourself, “Is inherited property taxable in Canada?” Since there are no inheritance taxes in Canada, you are not required to pay anything to inherit real estate. But you need to know that once you want to occupy the home, you will be responsible for the existing mortgages, repairs, insurance payments, property taxes, and more.
According to the Canadian government, when someone dies, they consider that the person sold their belongings just before passing away. People who inherit a primary residence from a deceased parent will not be subject to inheritance taxes. Then another question arises, “Is there a capital gains tax on inherited property in Canada?” Let’s understand the concept of this tax and see if you pay capital gains on inheritance.
Capital Gains on Inherited Property in Ontario, Canada
Generally speaking, a capital gain occurs when you sell a home for more money than you paid for it when you bought it, which means that you get a profit from the sale. If you sell it at a lower price than the original cost, it will be a capital loss. Keep in mind that these rules don’t apply to all types of properties. If it’s the primary residence, it’s not subject to capital gain taxes. Capital gains are a type of taxable income and are considered part of your income taxes.
Then, is there a capital gains tax on inherited property in Canada? People who inherit real estate from a deceased family member, sometimes decide to sell the home as they already own a home or just don’t want to keep it. In this case, they have to deal with Canadian inheritance tax. Here is some basic information that you need to know:
- Your tax liability when selling an inherited property is equal to 50% of the capital gain.
- Capital gains are taxable when you sell a commercial or secondary property.
- From the moment you inherit the vacation home until the time at which you decide to sell it, you will be subject to tax on its fair market value (FMV).
You have to pay capital gains tax on an inherited property if the following points apply:
- You decide to sell it.
- Real estate is a secondary or vacation home.
- The property will be turned into a rental property.
Any Other Taxes When Inheriting Property
Here are some key points that you must know about taxes regarding inherited property in Canada:
- If you sell the inherited property during the estate period before it is transferred to you, there is a tax on the estate, which is the final return to the person who passed away. Even if you don’t sell the property, its FMV will be taxed once on the deceased’s final tax return T1 and again on any transfer of ownership. This could increase your tax liability if real estate values rise during this time period. This means if the market has increased since then, the estate may need to pay capital gains on any increase in value between when the person died and when it’s transferred to their beneficiaries.
So it’s important to consider these additional taxes when making decisions about what to do with an inherited property in Canada. Note that except for Quebec, there may be a probation fee in every province.
- If a property was not the primary home of the person who passed away, their heirs will have to pay tax on it. The beneficiary, with guidance from the executor/executrix needs to come up with this tax bill before they can transfer ownership of the property. If it were a primary home to them, then there would be no tax due because of the capital gains exemption for inherited property. However, if this was a vacation home, it would be taxed at the time of death and before it is fully transferred to any beneficiaries.
- The property may not need to be taxed (even if it isn’t going to be your primary residence) when it is in the hands of the beneficiaries right after the assets have been transferred to them. This is because the estate has already sold the asset at fair market value and paid estate taxes. So, the key is to understand when the person who inherited the property sells it. If you sell it 3 years later, you will use the sale price as the proceeds and the ACB (adjusted cost base, which is the cost of the property) would be the FMV of the property on death that was used on the estate return (the last T1 return of the person who passed away). Estate return implies a T3 return which is filed after the person passes away and the fair market value has already been assessed on death which is the T1 return.
Selling Inherited Property In Canada
Consider the following steps if you have inherited property and want to sell it:
- Examine the will once again to see if you are the only one who inherited the property.
- Apply for probate — which is a process that shows that will is real under the law. It’s a legal right you receive to manage someone’s property when they pass away.
- Find and interview real estate agents to help you with the selling process.
- Get in touch with a lawyer specializing in real estate law to walk you through the legal aspects of the transaction.
- If besides you, others inherited the property as well, they need to agree on the real estate agent you chose and the conditions of the real estate contract since they have to sign the Listing Agreement.
- Empty the home.
- Apply for a home inspection as this will help you understand which parts are in good condition before buyers point them out.
What If Your Siblings Also Inherit Real Estate in Canada?
It may be a little bit problematic when there are other beneficiaries in real estate. What happens when you want to sell the home while your sibling wants to keep it or vice versa? If you decide to sell or rent the home, you will split 50% of the profits with your sibling. Or if you are the one who wants to keep the house, then you can buy them out.
Here is some basic information you need to know:
- Each sibling involved in the will receives an equal share of the property, if not stated otherwise. So, you need to buy them out if you want to become the sole owner of the property.
- If your sibling wants to sell the home and you don’t have enough money to buy them out, then your sibling has all the legal rights to sell their shared asset.
- If you want to stay in the inherited home, then you need to rent it from your siblings.
What to do Next?
Here are some tips you can follow once you inherit a property and wonder what to do next:
- You can opt for a property lawyer to probate the property.
- If you are not the only one inheriting the property, you can gather together to discuss your further steps about selling, renting out, or keeping the property.
- Contact home insurance providers for essential name changes, documents, or transfers.
- Complete a Fair Market Value Assessment so that property or real estate professionals will determine the value of your house.
- Deal with a professional real estate agent once you want to sell the home.
- Look after the home and make some minor renovations if necessary, such as repainting, replacing old doors and windows, landscaping, etc. This will increase the home value. For managing your property and handling repairs, you can opt for property management services.
- Change locks to feel safe.
Frequently Asked Questions
Now, let’s summarize the above-mentioned points and give short answers to a few frequently asked questions:
- If you inherit a house is it taxable in Canada? No, in Canada there is no estate tax. If it’s a primary residence, you don’t have to pay taxes, but if you want to sell or it’s a secondary home, then you have to pay tax on capital gains. Any other taxes are mentioned in the section of ‘Any Other Taxes When Inheriting Property.’
- Do you pay capital gains on inherited property in Canada or who pays capital gains on inherited property in Canada? You pay, when selling the home or when it’s a vacation/secondary property. Once you inherit real estate in Canada, you are subject to 50% taxation of capital gain.
- Can siblings force the sale of an inherited property in Ontario? If your sibling wants to sell a property and you want to keep it, they can bring a partition action by applying to the court. So, it’s better to buy them out. If you don’t have enough money for that, you can ask a public buyer to help you.
- Can the majority rule in selling an inherited property? If one wants to sell a home, while others want to keep it, that person can force the sale through a partition action. If you are the one who wants to sell the house and don’t want to get into this stressful situation, you can negotiate with your siblings to rent the property out to gain monthly payment. In the event that one of the beneficiaries seeks a partition, the majority will not be able to decide to keep the property.
- Do beneficiaries pay tax on inheritance in Canada? No, if it’s a primary residence. But, again please read the above section regarding any other taxes to get a better understanding.
- Do you have to claim inheritance as income? Money that you get from an inheritance is not a taxable income. The money you inherit is not subject to taxation and is not required to be reported as income.
While it’s not easy to deal with inherited property, there are some fundamentals that you need to know. Double-check this guide once you need help. You can get in touch with our professional team at Manage Your Property if you have any questions.