Inheriting real estate in Canada is a process accompanied by specific tax implications and legal considerations that are unique to the country's tax laws. When an individual inherits property, understanding how these assets are taxed is crucial.

The Canadian tax system treats the inheritance of real estate differently based on several factors, including the type of property inherited and its use. In this article, we’ll learn about the Canadian inheritance tax on property, as well as capital gains and other relevant tax rates. You can use this as a comprehensive guide for navigating the complexities of inheriting real estate in Canada.

The Regulations that Dictate Canadian Inheritance Tax on Property

In Canada, when a person passes away, the government views it as if they disposed of their properties just before their death, but these properties remain part of their estate. Generally, when you inherit property, you don't pay taxes on its market value. If the deceased left a house to you as a primary home, you won’t owe estate taxes when you inherit it.

However, if the property you inherit is not a primary home, you or the deceased person’s estate must pay capital gains taxes on it before you can officially own the property. This rule also applies to commercial properties.

What Is a Capital Gain and the Capital Gains Tax?

Understanding inheritance taxes involves knowing about capital gains. Capital gains are the profits from selling a property or assets. This gain is the difference between the purchase price and the sale price.

letter cubes spelling out tax time with a click in between

Capital gains are taxable income. The capital gains tax is the tax paid on the profit made from such sales and is reported as part of income taxes. When inheriting property, you might owe taxes based on these gains, depending on what you plan to do with it. This is crucial to consider when handling inherited assets, as it affects your financial responsibilities.

Many people who inherit property, such as a house from a relative, often decide to sell it. This could be because they already own a home or don't want the responsibility of maintaining another property. Selling an inherited property involves understanding certain tax rules. Here's a simplified breakdown:

  • Selling your primary home: No capital gains tax is applied.
  • Selling an inherited property: You're taxed on 50% of the profit (capital gain) made.
  • Selling secondary homes or vacation properties: Profits are taxable.
  • Selling commercial properties: Profits are taxable.

Capital gains are also typically the difference between the sale price and the original purchase price. However, when selling an inherited property, the starting value for calculating gains is often the property's value when you inherited it, not when it was originally bought. There's no specific inheritance tax on property. Understanding these tax rules is key to ensuring you pay the correct taxes on your personal income tax return.

real estate agent holding a sale pending sign

When inheriting any asset, Canada's tax system uses a “stepped-up basis”. This means the asset's value for tax purposes is set at its value on the day you inherited it, not what it was originally worth.

Figuring Out Capital Gains Tax Rates on Inheriting Real Estate

To determine the capital gains tax rates on inherited real estate, follow these steps:

1: Get an Appraisal and Save Old Records

Obtain a fair market appraisal of the property's value for probate purposes. This information is crucial for future decisions regarding the property.

2: Pay Capital Gains Tax If the Inherited Asset Is a Secondary Property

If the inherited property is a secondary residence, capital gains tax applies. The tax is calculated based on the property's increase in value from when it was initially purchased to when it was inherited.

3: Pay Capital Gains Tax If You Sell the Property

If you sell, you are responsible for paying 50% of the capital gains tax as part of your income tax. However, if the property was a primary residence and you decide to keep it, the final tax return of the deceased covers any owed tax​​.

4: Plan For Your Estate’s Future

This involves considering the future of the inherited property. Whether you intend to keep it, sell it, or pass it on to your heirs, planning ahead can help in managing potential tax implications and maintaining the property's value.

a group of people making a financial plan looking over graphs

5: Consider Renting

If you're not ready to sell the inherited property, renting it out can be a viable option. This not only generates income but may also have tax implications. Rental income is taxable, and expenses related to maintaining and renting the property can often be deducted. However, if you convert the property into a rental, you will be charged capital gains tax because it will become an investment property.

FAQs

Here are some commonly asked questions:

Do I Pay Taxes On Inherited Property?

No immediate taxes are due on inheriting a home unless it’s a secondary residence.

How Long Do I Have to Sell an Inherited House?

There's no time limit to sell an inherited house in Canada, but taxes apply based on the property’s change in fair market value.

Are Capital Gains Due On Inherited Property?

Capital gains tax applies if the property was a secondary or vacation home, is converted into a rental property, or is sold.

Do You Have To Report the Sale Of Inherited Property in Canada?

Yes, all property sales must be reported.

What Is The Holding Period For Inherited Property?

There's no maximum or minimum holding time for an inherited property.

Do You Need to Declare Inheritance on Your Tax Return?

Inheritances don't need to be declared with your income tax unless under certain conditions like selling the property or converting it into a rental property.

Bottom Line

This article provides a comprehensive overview of inheriting real estate in Canada, highlighting the importance of understanding capital gains and related tax implications. For specific situations, it's advisable to consult a tax professional or a property management company with legal expertise. Contact GoodDoors Property Management and we’ll be happy to assist you!