You’ve inherited a home: do you owe tax?

It’s common practice in Canada for parents or grandparents to leave their home or cottage to a child or grandchild. It’s also common practice for the taxman to expect a share of the transfer proceeds, as the value of the property has now transferred from owner to another. One exception is if a surviving spouse or common law partner inherits the property, then no tax is owed on the transfer of the estate. Inheriting a secondary residence In general, however, when a piece of property is bequeathed it may subject to tax, if the property was not a principal residence. That means if you inherit your parent’s cottage — a vacation home not designated as a principal residence — then the transfer of ownership would be subject to tax. This tax is calculated as if the cottage had been sold at a fair market value. Under Canadian tax law, the taxes on this transferred cottage property are owed by your parent’s estate (not by the person inheriting the estate). But, if the estate is cash-poor and property rich, you might find yourself taking out a loan or selling assets in order to come up with the estate taxes owing. Inheriting a primary residence On the other hand if the bequeathed property has been a principal residence, your parent’s estate would not be subject to capital gains tax on the disposition of the property. However, if you were to sell your parent’s principal residence — say, because you already have a home — the sale would be subject to capital gains tax, since you’re selling a piece of property that is not your primary residence. Sell the house shortly after you inherit and you’ll find the capital gains tax will be nominal, as there will be little difference between the assessed fair market value that was done when you inherited the property and the sale price. Multiple owners Of course, all this gets a lot more complicated when you have multiple owners. Say, for example, your parents leave their primary residence to you and your two sisters. As siblings, you make a unanimous decision to allow the youngest to move into the home and to take out a mortgage to buy out the other two siblings. Since the youngest now considers the inherited property as their primary residence, they won’t be subject to tax. The other two siblings, however, would have to pay capital gains tax once the youngest child has moved into the home. That’s because the change in use of the home triggered what the taxman calls a “deemed disposition”— the use of the home has changed, and thus the home is considered to have been sold for tax purposes. FMV is the key The best way to determine what’s owed and when is to pay for an independent fair market value (FMV) assessment of the property whenever you anticipate a change in the property’s use. That means:

If you plan on selling your parent’s primary residence, you need to get a FMV price, so you can calculate the capital gains you will owe (subtract the sale price from the FMV price and you’ll know how much you’ll owe tax on);
If you plan on renting out the property, instead of selling, you will also need to know the FMV. Because you are changing the use of the property — from primary residence to investment property — the taxman considers the property sold, for tax purposes. That means, you’ll theoretically owe capital gains tax on the difference between the value of the inherited home and the FMV of the home when you chose to start renting it out.
If multiple people inherit the home and one child decides to buy out the other siblings, you’ll need to establish a FMV price not only to determine the buy-out price, but also to determine how much tax is owed on the deemed disposition of the property.

An independent assessment of your property should cost no more than $1,000 (and typically starts at $350). Given how much you could save in taxes this fee is a nominal expense.

Comments Cancel reply

Nancy says:

March 9, 2020 at 2:29 pm

Here’s a question. If someone inherits a house from someone who was not a family member but friend. Does this person have to pay any other taxes aside from the welcome taxe? They are not sure to either rent or sell.

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Janet Hill says:

October 10, 2020 at 8:07 pm

What happens in the case of 4 beneficiaries inheriting a farm? If one of the beneficiaries wants to be bought out but no one is in a position to buy that individual out, what transpires?

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1. MoneySense Editors says:
  
  November 12, 2020 at 12:02 pm
  
  Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
  
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Donna pitre says:

May 6, 2021 at 10:01 am

My dad had my name on the deed of his home, he passed away and I would like to sell, do I have to pat Capitol gains tax

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Carolyn Britton says:

February 23, 2022 at 12:54 pm

What if I live with my parent in their house and I have already bought out the other siblings year before? I am the only one inheriting the house in my mothers will. What are my costs?

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Veronica Banks says:

May 28, 2022 at 4:32 pm

Hello . I’ve had my fathers house for five years since he passed and now I would like to move in and live there. I renovated the house and repaired many things and it’s doubled in value. I am the sole heir. Will I owe capital gains tax when I move in ? What about when I Decide to sell it ?

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1. MoneySense Editors says:
  
  June 8, 2022 at 11:31 am
  
  Thank you for the question. We invite you to email it to [email protected], where it will be considered for future articles.
  
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barbara sarahan says:

July 31, 2022 at 1:56 pm

can the house be inherited by daughters or son without being sold if we decide to keep the house can we inherited without being tax..the same as a spouce. who pays the taxes if the house is sold after my mom dies.I need to understand as my poor mother is almost ninety

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Delton says:

November 3, 2022 at 2:54 am

If you are none family and power atternoy inheriting proerty, do you have pay property transfer tax, it’s not clear if power atternoy has rights same as next to kin?

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Tracey Oranchuk says:

November 27, 2022 at 2:38 pm

My Step Father passed and left my Mom a prime residence home and farmland .My Mom sold the farmland. She wants to know if she will have to pay capital gains for selling the farmland. Thank you.

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Brian Wilson says:

November 21, 2023 at 2:21 pm

We want to add our daughter’s name to our home title. How would that affect her inheritance
tax when we both die?

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