Grieving the loss of a loved one is difficult for anyone, but dealing with legal issues and the paperwork associated with their death can only compound the issue. If you find suddenly find yourself the owner of your family home, your first questions will undoubtedly be about the financial implications of this acquisition, and what, if any, are your obligations to the Canada Revenue Agency (CRA).
Taxation
When a piece of property is bequeathed to an individual, it may be subject to Canada\’s tax laws.
If the house is not considered a primary residence, say in the case of a vacation home or cottage, the transfer of ownership is subject to tax, which is calculated as if the dwelling has been sold at fair market value (FMV). The good news, however, is that under Canadian tax law, the taxes on this transferred property are owed the original owner\’s estate, and not the person inheriting. Of course, if there isn\’t enough money in the estate to cover these taxes, you will unfortunately need to figure out how to fulfil the balance owed.
In the case of a primary residence, the estate is not subject to capital gains tax on the disposition of the property.
Capital Gains
According to the CRA, when you sell a capital property at a profit, the result is capital gain. Real estate is considered a capital property by the CRA, and when a home is sold at a higher price than what was originally paid, you are taxed on that difference.
In many cases, a family member inheriting a home may already own a home – your primary residence, and decide to sell the inherited property. If you sell, the sale is subject to capital gains tax since you are selling property that is not considered your primary residence.
If there is capital gain on the property, which is often the case, it is only subject to taxation if it is a secondary residence – the CRA considers the profit from the sale as income. In the event that the real estate sold is your primary residence, you won\’t owe taxes on the capital gain from the sale.
Any taxes owed on the sale are determined by subtracting the FMV of a home by its sale price, less any expenses. If you were to sell the home upon inheritance or soon after, the capital gains tax would be nominal, since you would most likely be selling it close to, or at FMV.
Inheriting a home can become even more complicated when the real estate is left to more than one person, but understanding your tax obligations can help take a lot of stress off of your shoulders during this difficult time.
