Common Tax Mistakes to Avoid When You Want the Kids to Inherit the House
We all care for our kids, and many parents intend their children to inherit their homes, so that the wealth stays in the family.
This is a natural desire, and very commendable. It seems so natural, in fact, that most people can’t even imagine the tax and inheritance traps that lay in wait for this simple move, leaving your children with much less than you had anticipated or intended. Others anticipate the traps, and try to avoid them, making additional mistakes in the attempt. Unknowingly, of course, but the damage is done.
The results of such mistakes range from inheritance conflicts to additional income taxes (often referred to as inheritance capital gains taxes in Canada), and generally causing your family unintended losses and unnecessary additional grief.
Let’s talk about two different types of property and how to best secure them for your children.
Your Home or Primary Residence
Sometimes parents will transfer a fifty percent or bigger portion of their house to their child’s name, to avoid inheritance disputes and reduce probate fees. This type of transfer of your home to your kids will often result in them being taxed 50% on any added value of their transferred share, due to it being legally, a sale. They may also have to pay additional taxes and fees on it, unless they use it as their primary residence, which is a relatively rare occurrence.
In view of this, it is better for parents to remain the sole proprietors of the property until they pass on. If the property does not then become the child’s primary household, it will end up incurring a capital gain on investment tax, but there is nothing to be gained (and a lot to be lost) by trying to make a partial transfer in advance by making a “ghost sale”.
Transferring a cottage may be a good idea to do in advance, because it is a different category of dwelling. To be sure how to act in your specific circumstances, we advise to consult a specialist.
It is not uncommon for elderly people to change their bank account status to a joint account with one of their kids. This is meant to save them from incurring probate fees. Most make the common mistake of continuing to report their income from that bank account on their tax return. This essentially means that the joint tenacity is a formality, and the child is not really the co-owner of the account. As far as the CRA is concerned, this is not true joint tenacity, which means the probate fees will not in fact be reduced.
An additional problem of such a strategy is that, in a family of many siblings, once you put one child’s name on the bank account, he or she might decide they will be the account’s owner henceforth, leading to litigation of the estate and conflict between siblings.
If you are not sure what to do in your specific scenario, the best thing is to consult with specialists.
We have a great deal of experience dealing with inheritance law, capital gains on inheritance tax issues and other related topics. Call us now and we will be glad to help you make sure your family’s wealth stays within the family.