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There are rules around capital gains on the sale of joint property in Canada. But how does death affect tax and probate fees for joint tenancy?
I have joint tenancy with my mother on two properties—a condo in Toronto and a cottage in Kawartha Lakes. She passed away in June 2014. I am keeping both properties. My accountant says that he can count the condo as my mom’s primary residence, but I have to pay capital gains tax on the cottage even though we have joint tenancy. I thought that with the right of survivorship, I didn’t need to pay capital gains tax? He says I am wrong. Can you please tell me what you think?
—Kim
The Canadian Inheritance study by Decima Research estimates that about $1 trillion in inheritances will be received by Canadian Boomers in the next 20 years. So your estate planning conundrum is becoming increasingly common, Kim.
When property is owned by more than one party, it is frequently held in joint tenancy with the right of survivorship. Spouses typically hold property as joint tenants, whereby upon the death of the first, the asset passes directly to the survivor and does not make up part of the estate of the deceased. More and more, I am seeing elderly parents holding property in joint tenancy with their children, which has pros and cons.
It bears mentioning that there is another way to own property jointly. You can own it as tenants in common. This is when two or more parties own a share of the property that does not pass to the survivor automatically on death. This is more common for common-law partners who want their share of a home to go to their children, for example. Another common situation could be where siblings own a family cottage together.
One of the benefits of joint tenancy with rights of survivorship is that the time and cost to administer an estate may be reduced. In particular, assets held in joint tenancy that pass to a survivor typically avoid probate fees. Probate fees in Canada can be as high as 1.5% of an estate (Ontario) and must be paid on certain assets in order to validate the will and permit the estate trustee to distribute assets to the beneficiaries. Other provinces have lower, flat fees and probate is less of a financial concern.
One of the many negatives of joint ownership of a parent’s principal residence with a child is that capital gains tax issues may arise.
In some cases, Kim, when someone gifts an asset to another person, there is capital gains tax that arises at the time of transfer. This is because when you transfer an asset to a non-arm’s length person, like a child, even if money hasn’t changed hands, you are generally deemed to have sold it at fair market value.
In your case, it could likely be argued that the gift of half of your mother’s condo and cottage was not an outright gift, but rather a case of a resulting trust. Assuming your mother was the sole owner at the time of transfer, used the properties herself and paid the ongoing maintenance costs, case law may suggest that the presumption of advancement did not apply, and you were technically holding half the properties in trust for your mother.
Accordingly, capital gains tax may not apply at the time of transfer. Though the properties may have been legally held jointly by the two of you, the properties may have been still beneficially your mother’s, until her death.
Every Canadian is entitled to have one principal residence that grows in value tax-free. Before 1982, a couple could have more than one principal residence. So, spouses could each have had a principal residence.
Your mother had two properties, meaning that one of them was growing in value on a tax-deferred basis. On your mother’s death, she would be deemed to have sold the two properties and one sale would be taxable, regardless of her holding the properties jointly with you. Capital gains tax would be payable at that time.
The capital gains tax didn’t exist in Canada prior to 1972. There was also a capital gains election that your mother may have made if she owned her real estate prior to 1994. A one-time election was available in 1994 to report a capital gain of up to $100,000 tax-free and bump up the cost base for a taxable property like a cottage.
So, I’m sorry to report that your accountant is correct, Kim. There is capital gains tax payable on one of your mother’s properties. You have discretion as to which property you deem to be her principal residence and you may be able to designate one property as her principal residence for some period of time and one property for another period of time.
In other words, if she owned her condo for 20 years and her cottage for 10 years, you might deem her condo to be her principal residence for the first 10 and her cottage for the second 10, in particular if the cottage was worth more and/or rose more in value.
In this example, half of the condo capital gain would be taxable and the cottage capital gain would be tax-free. In this way, you can at least retroactively minimize the capital gains tax payable.
Another important point is that if your mother didn’t pay capital gains tax when she gifted the properties to you, which I assume she didn’t, the properties may technically be subject to probate and the resulting cost of probate fees.
This is because these assets still technically belonged to your mother on her death and likely should have made up part of her estate for probate purposes. You should seek advice from an estate lawyer.
Capital gains tax is a fact of life, Kim. And in this case, a fact of death. Although it’s unfortunate to pay it, it’s better than the alternative—having an investment that has not gone up in value or worse yet, has lost money.
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Kim’s original question was why is she having to pay capital gains if she has joint tenancy on two properties with her mother who has passed away. I assume by Kim’s question that she and her mother were on the purchase agreement for both properties. The answer to Kim’s question keeps referring to the mother gifting the properties to her. What if the properties were not gifted and both properties were purchased together?
Jason,
Frequently missed when there are two properties which could qualify as the principal residence (PR) is completing a form T2091 for each qualifying property. This takes advance of the “Plus 1” rule for principal residences and reduces the taxable capital gain.
The calculation is the: capital gain (CG) x (number of years claimed as PR +1) / number of years owned.
e.g. CG of $10,000 on PR owned for 10 years.
$10,000 x (9 + 1) = 100,000 / 10 = 10,000. GG 10,000 – exemption 10,000 = $0 net CG.
If both properties were owned for the same time periods you claim the property, which has the larger gain in value, as the principal residence for all but one year of ownership. The other property would be claimed for 1 year. Using the +1 rule you get to claim 2 years of ownership. In this case 20% (2/10) would be exempt amount of CG.
My father passed away a year ago. his red wife passed away in 2010. when she passed away her daughter became joint owner of their cottage with my father. The plan was always that if something happened to my dad she would get the cottage. However, now we have been told that the cspitsl gains owned comes out of his estate and she walks away with cottage. How is this right?
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.
Hello
I was going thru divorce 2007 and put my mother on title thinking it was protecting my asset. I was advised this was safe by lawyer. She did not contribute any funds. There is no longer any mortgage today. My mom has recently deceased in June 2020. She also had a matrimonial home with my father who is also now deceased, my father june 15, and mother june 30. Matrimonial house with parents was sold Nov.2020 My father was in nursing home for 2 years prior, and my mom permanently lived with me 1 1/2 yr til deceased.
On closing parents estate I was then informed my inheritance with be on hold until I had to have application “right to Survivorship” for my house we had together. I did not know about this until then, and realized the complications. R to S avoids probate, but what happens with Capital Gains. How to avoid the least taxes. As family i would be responsible. My parents sale is aprox.$400,000. for 40yrs. which on tax filling both will claim matrimonial home as principal residence. I was permanent caregiver for my mom for over 1 year. My house is my principal res. has more value aprox $450,000. we owned for 13years. I will not have control when or how my mom claims principal residence. But when do i need to file the Right to S/ship immediately in order to close estate or can i push it into following year 2021.. Is there a way to deferr the tax to next year ? OR is there a way my mom claims principal res. for matrimonial home in 2020 and then my house in 2021 claim principal res. if R to S is applied after in January 2021. ? thank you
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.
1-21-21. parent adds on adult child, becomes joint owner a sale of property WHO receives payment of proceeds?
When calculating the capital gains, how do you account for renovations/ additions which have contributed to the house’s increased market value? Would you also explain what figures are used in the calculation – such as original purchase price, years of ownership etc.,
Thank you Marg R
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 a qualified advisor.
We built our house in 1962 and continued to upgrade over the years. My spouse passed away in 2021 and I sold the house in September of 2021. How do I figure out capital gains or is there any for me to claim.
If you sold your principle residence and moved to your cottage for a year or two
Would there be capital gains on the cottage is sold 2 yrs latter
Sorry I find this article really confusing.
“In your case, it could likely be argued that the gift of half of your mother’s condo and cottage was not an outright gift, but rather a case of a resulting trust”. Is this talking about the time that you become a joint owner while your mother is alive, or the time that she passes and now all of it is yours?
“Accordingly, capital gains tax may not apply at the time of transfer… the properties may have been still beneficially your mother’s, until her death.” The time of transfer is AFTER her death is it not – when the asset becomes fully yours? So how is her benefiting during her life, exempting you from taxes after her death? Could this be any more unclear?
“In particular, assets held in joint tenancy that pass to a survivor typically avoid probate fees.” … “Another important point is that if your mother didn’t pay capital gains tax when she gifted the properties to you, which I assume she didn’t, the properties may technically be subject to probate and the resulting cost of probate fees.” So capital gains tax is required at the point of entering into joint tenancy to avoid probate fees. Yet you assume she didn’t do this. Why is that an assumption here if “typically” this situation avoids probate fees… then you would assume this would be typical would you not? So typically everyone pays capital gains at the signing of joint tenancy?
Rather than following all the edge cases, I’m trying to find what the answer is to the simplest use case here, which I guess is “In this example, half of the condo capital gain would be taxable and the cottage capital gain would be tax-free.” So the mother’s non-principal residence’s capital gains is taxable. So there appears to be no tax benefit to joint tenancy at all. ??
Who is liable for the capital gains, Kim or the estate of her mother?
If I was a cosigner but not lived at that propyand the person has passed. Appaii now own the house! I have to sell that house now because I already live at my own home what do I need to do?