If you are inheriting or passing down property in Ontario, the regulations and taxation surrounding it will be impacted depending on if it is a rental property, principal residence, vacation property or commercial property.
Primary Residence and Vacation Properties
If a property being passed down is the primary residence of the deceased, it is received at fair market value, and you are only subject to capital gains tax if you sell the property. Vacation properties are treated the same for tax purposes.
If you are making up a will, make sure your spouse is listed on the title of the property as a joint tenant – particularly if you are not married and are common-law. If you are planning on leaving the property to children, ask the children first if they would be interested in inheriting and using the property, or if they would just sell it after your death. If they will be selling it and they already own property, they would have to pay capital gains tax on the proceeds from the sale.
Talk to a financial planner if the property is a high-value one; there are strategies you can use such as trusts to help offset those capital gains taxes, but most have upfront costs to set up so the savings in capital gains tax would have to be high enough to justify them. You can also gift the property during your lifetime, but this is a risk as you may not be able to recover money from the property if you need it.
Leaving a property to multiple adult children can make for a difficult situation – when a standard will is drawn up for this, each child becomes a “tenant in common” on the house, and each has an equal share of it. This means that if Dave, Judy and John all inherit their parent’s house, they are all equally responsible for it.
If Judy doesn’t want to sell it, but Dave and John do, Dave and John can’t sell the house unless they buy out Judy’s one-third share – if she’ll let them. It’s much better to make arrangements in advance; if Judy wants to live in the house, for example, you can make arrangements to leave Judy the house, and make up the difference to Dave and John by leaving them more liquid assets that they can sell or cash equivalent to what their share of the house would have been at fair market value.
For more information on what to do if you’ve inherited a primary residence, see this blog post.
It’s almost more important to have a plan for a rental property as it is for your primary residence, since you need to take your tenants into account. Have a frank conversation with your spouse about if they want to manage the property or not if you die, and consider a property management company if you don’t. If you are leaving the property to kids who want to sell it, they should be aware of all of the regulations surrounding evictions for purposes of sale – Ontario law states that you must give the tenant 120 days notice if they don’t have a lease. If they have a lease, they must wait until the lease period is over for the tenant to leave. The Toronto Realty Blog offers an excellent cautionary note for those who want to sell a property before the tenant has vacated – if you don’t have time to read it, it’s just not a good idea.
Any commercial property should be wrapped up as a part of a business succession plan, which you should have in place if you own commercial property. This is definitely an area that you require a lawyer for to ensure that it is done correctly. Any commercial properties should be part of a business, and your inheritors will be bequeathed a portion of the business after partners, creditors and others are paid out first.
If you own property in the US, but are not a dual citizen, you should set up a US trust to handle the property, particularly if it is a higher-value one. This way your heirs won’t have to pay Canadian taxes on the property, only the trust will owe US taxes if it is sold. Consult with a real estate and/or tax lawyer to set this up.
If you need a company to handle rentals or listing a property, we’ve been doing it as a family business in Toronto and surrounding areas for a number of years. Contact us for more information.
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