What would you do with a $960,000 inheritance?
According to a recent survey conducted on behalf of Sun Life, that’s the average amount Canadian boomers, those currently between the ages of 58 and 77, intend to leave for their millennial children. But millennials aren’t prepared for the lifestyle changes that may come with a sizeable inheritance.
In this article, we’ll discuss estate planning tips for anyone expecting to leave or receive an inheritance, including Canadian inheritance laws, tax implications for property and real estate, the probate process in Canada and more.
Understanding inheritance laws in Canada
Inheritance laws in Canada differ from province to province.
The only thing that the federal government dictates about inheritance is tax.
Do I have to pay inheritance tax on my parents' house in Canada?
No, despite common misconceptions, Canada does not have an inheritance tax. Instead of taxing beneficiaries like our neighbours in the US, the taxes are paid at the estate level. The assets that fall into the estate may be subject to capital gains taxes, and/or probate fees if probate is required.
What happens when you inherit property?
When a parent passes away, a few things need to happen before any inheritance can be paid to beneficiaries.
- The executor, or an estate administrator*, must step forward to officially begin the estate settlement process.
- All outstanding debts and liabilities of the estate must be settled. This includes filing a final tax return, paying any taxes owed by the estate and ensuring any outstanding bills and liabilities are settled.
- The estate may be required to go through probate to give the executor legal authority (grant of probate) to access and manage the deceased's assets. Probate fees will be charged if probate is required; the amount varies by province.
- A certain amount of time may need to pass before assets can be distributed. This allows anyone with a legal or financial interest in the estate enough time to come forward. The period may differ from province to province.
- For example, in B.C. executors must wait at least 210 days after probate is granted before they can distribute assets to beneficiaries.
- Once debts and taxes have been paid and the allocated time period has passed, beneficiaries will receive their inheritance and official documentation of transfers of ownership.
*An executor is someone you appoint in your will to administer your estate. When there is no appointed executor, the courts appoint someone to be your estate administrator based on the provincial regulations instead.
Common tax implications of inheriting property
Two primary things that might affect someone’s inheritance are probate fees, which are sometimes referred to as estate administration taxes, and capital gains taxes.
How probate fees affect inheritance
If the parent who has passed away didn’t have a will, their estate is required to go through probate so that the provincial courts can confirm the passing and appoint someone to act as their estate administrator.
If they did have a will, their estate may not need to go through probate. Probate is dependant on the assets held and more likely imposed when an estate is over a certain monetary threshold, for example, $50,000 in Ontario, if the deceased owned real estate on their own, or if the executor needs a grant of probate to access estate assets.
There are fees associated with probate applications. These fees are most often referred to as probate fees, probate tax or estate administration tax.
Probate fees in Canada differ from province to province and are often proportional to the value of the estate.
See a breakdown of probate fees by province →
How capital gains tax affects inheritance
When someone passes away in Canada, the Canada Revenue Agency (CRA) views their property as being deemed disposed.
“Deemed disposition” means that for tax or legal purposes, the CTA treats their assets as if they were sold at fair market value on the date of their death, even if no actual sale occurred.
The executor or estate administrator will file a terminal tax return for the deceased, and they will pay any amounts owing from the proceeds of the estate.
This also means the estate pays any capital gains tax owed on all eligible estate assets at this time of ‘sale’ before anyone inherits anything.
How do I avoid capital gains tax on inherited property in Canada?
Beneficiaries do not need to pay capital gains tax on inherited property when they become owners, because the taxes have already been paid.
However, if a beneficiary sells the property in the future and it is not their primary residence at that time, they may need to pay capital gains tax from the date they received the property until the date they sell it.
Is it better to gift or inherit property in Canada?
Gifting property during one’s lifetime, also referred to as early inheritance, means that property would not fall into the person’s estate, therefore avoiding probate fees.
But it may trigger immediate tax consequences. For example, a parent gifting a secondary property to an adult child while they’re alive, rather than through their estate, doesn’t mean they avoid paying capital gains taxes.
Keeping vs. selling the inherited property
Inheriting property from parents, especially if the beneficiary already has their own primary residence, may introduce a dilemma. Do they keep it, or do they sell it?
Here’s a breakdown of some pros and cons of both options.
Option 1: Keeping an inherited property
Option 2: Selling an inherited property
Joint tenancy and survivorship rights
If someone co-owned any property with their parent and had rights to survivorship, the property would immediately pass to them upon the parent’s death.
This means it wouldn’t become part of the estate and wouldn’t have to go through probate.
If a beneficiary inherits property on which they are named a joint tenant, which means they hold a share of the property and the parent owned another share, the share flows through their estate as per their will.
In both cases, the asset may be subject to capital gains tax. If so, any taxes owing would be paid by the deceased’s estate, not the beneficiary.
Transferring property ownership
When a beneficiary inherits real estate through an estate, the executor typically has a responsibility to assist with the property ownership transfer to the beneficiary.
The executor may need to prepare or assist in preparing forms to transfer the property, such as:
- Declaration of Transmission proving their authority as executor, typically supported by a probate certificate
- Transfer of Land forms to move the property title from the deceased’s name to the beneficiary.
In some provinces, the executor must complete this step as part of the administration process before the property can be transferred to the beneficiary.
In some jurisdictions, the beneficiary may need to sign forms to accept the property transfer. Depending on the jurisdiction and timing of the transfer, the beneficiary may also need to pay additional land transfer taxes or registration fees.
How to avoid family disputes over inherited property
After the loss of a parent, it can be hard to deal with grief and the stress of managing inherited assets, especially if those assets are shared with the family.
Here are some ways to help manage inheritance disputes among family members:
- Choose a neutral setting that encourages dialogue among the family, where everyone feels comfortable expressing themselves openly.
- Practice active listening to be empathetic and better understand each family member's stance. Focus on common goals as a family unit and see where there are shared objectives, such as preserving family assets.
- Make sure the executor provides information when they should, as they have a legal duty to do so. Beneficiaries should be kept updated on the estate plan, assets, liabilities, and distribution plans.
- Approach conflicting topics carefully and remember that the deceased may not have spoken to everyone equally about their final wishes or that they made a will.
- If necessary, look for a professional to help mediate. An estate planning lawyer or mediator may provide expert advice and help mediate discussions with the family, especially for complex legal or financial issues.
Here are five smart ways to include kids in a will →
How is inherited property split between siblings in Canada?
Property is divided according to the will. If a parent didn’t have a will, intestacy laws apply, which may vary by province. Usually, estates are split between surviving spouses and dependent children.
Tips to resolve inheritance disputes between siblings →
Inheriting property with a mortgage
According to a recent Willful and Angus Reid study, 1-in-10 Canadians think their mortgage disappears when they die. But that’s not true.
In Canada, mortgages stay with the property they’re on, not the person who owns it.
So when someone passes away, the mortgage on their property stays with it. If a beneficiary is set to inherit the property, they can either keep it and take over the mortgage, or sell it if they can’t afford the mortgage.
If the mortgage was insured, it would be paid off by the policy, not the beneficiary.
If the deceased jointly owned a property with a mortgage, both the property and mortgage pass to the surviving co-owner.
Legal considerations when inheriting property
Beneficiaries and executors don’t have to go through estate settlement alone. They can hire professionals to help with tax considerations or disputes if necessary.
Remember that beneficiaries who hire legal counsel will likely have to pay legal fees out of pocket. If an executor wanted to get professional help with their executor duties, these fees would be covered by the estate itself but would also reduce the compensation the executor is entitled to.
Next steps after inheriting property
Before an executor can distribute property, they have other responsibilities for settling the estate. A beneficiary’s first task is to help the executor with any required documents or information they need from the beneficiary.
When everything is settled, then assets will be distributed to beneficiaries.
Remember, the first step to taking control of inheritance is to make a will. If your parents haven’t already done so, encourage them to!
Making a legal will online with Willful is easy and affordable. You can also add an additional family member to your plan. Plus, every Willful user gets free unlimited updates for life, so you can update your wishes as life and your family change.