For many Canadians, their family home or cottage will become their estate asset with the most value.  Real estate prices have increased exponentially and, despite future uncertainty around inflation and interest rates, homes and cottages are expected to hold value indefinitely. Not surprisingly, this has also led to an increased concern and confusion around how and what tax will be assessed on these assets on death. If a testator wishes to gift real property through their will, it may be worth considering the future financial impact on both the estate and the beneficiaries to avoid surprises later down the road.

Probate Fees

In order for real property to be distributed under a Will, there will generally be provincial probate fees or estate administration tax payable as part of the probate process.  While these fees are not an income tax or part of the deceased’s final tax return, they are generally unavoidable when dealing with real estate in Ontario.    

Tax

In the case of real estate, there is also a deemed disposition upon death, meaning the property is treated as if it had been sold by the deceased just prior to death. As a result of the deemed disposition, there may or may not be capital gains tax to pay. Taxpayers may be able to claim a principal residence exemption for a single qualifying property (or their estate trustees can apply for the exemption); however, if they own a home and a cottage, for instance, one property will generally be subject to capital gains tax. 

Furthermore, there may be a tax deferral if the property was held jointly with a spouse or left to a spouse, meaning any capital gain remains deferred and is only taxed when the surviving spouse disposes of the property.

What beneficiaries should be aware of is that they will become responsible for capital gains that accrue between the deceased’s death and when they decide to sell the property. In recent years, where values have been increasing at an accelerated pace, this may result in a significant tax payable. 

In summary, there are several mechanisms in place that allow estates and beneficiaries to minimize the tax payable resulting from a transfer of real property. Seeking legal advice from a professional will allow you to explore the options and choose the one that’s best for you.

Thanks for reading.

Ian and Marie Kazmer