The first question everybody asks is, do you pay tax on inherited property?
The answer is, not exactly. Canada Revenue Agency will consider any money the deceased had previously owned as part of their estate, and deduct a tax from the overall estate value.
This usually means that there is no additional taxation on any parts of the estate inherited separately, since it had already been taxed. But it is not the full answer. Let’s elaborate.
Types of Inherited Assets
There are two types of inherited property that may be part of the overall inheritance estate.
The first is cash money and personal property. This includes bank accounts, personal property, vehicles and non-investment real estate.
The second type of inherited property is investments. This category includes everything that may rise in value and generate income.
While there is no tax upon accepting any part of property from the deceased, property with changing value such as stocks or investment real estate may later incur a tax. It is called capital property and any rise in its value will fall under the category of capital gains on inheritance in Canada.
How do they calculate it?
At the moment of inheritance, a stock share, real estate property or other investment assets will have an estimated market value. When you receive a stock that has a market value of one thousand dollars, you don’t pay any tax on it. But if, a year down the road, it’s value has risen, the difference is called capital gain on inheritance, and will be taxed accordingly.
If the Property is Inherited by Spouse
If the property of the deceased passes to a surviving spouse (or common law partner), many estate taxes are avoided. It is not the same as inheritance, and the main estate tax does not apply. This includes retirement funds, real estate and investment property.
When There is No Surviving Spouse
If there is no surviving life partner who would get the property transferred to them, then the law is that all assets are to be sold. The value they are to be sold at is that which they were priced at, when he or she passed on. Any additional value that was gained by investment properties from that moment to the moment of the sale, will be considered capital gains on inheritance in Canada and taxed accordingly.
This was only a general overview of this complicated topic, but we sincerely hope this sheds a light on it, providing some much-needed clarity.
If you’ve inherited an investment property in Toronto and are wondering what to expect in terms of taxation, we will be glad to assist. Our experience in property management in Toronto, as well as investment real estate advising, has given us all the necessary knowledge to help you clarify all inheritance tax related matters, as well as see how you can minimize the amount of money you will end up paying by filing it correctly.