Inheriting Property in Canada: Understanding Tax Implications and Responsibilities
Inheriting property can be a mixed blessing, bringing both joy and responsibility. One aspect that often raises questions is the tax implications associated with inherited property in Canada. In this article, we will discuss the tax considerations for beneficiaries who inherit property in Canada and outline the steps to follow when dealing with taxes on inherited property.
Tax Implications of Inherited Property in Canada
Capital Gains Tax
When property is inherited in Canada, the beneficiary is not immediately liable for any taxes on the property. However, the estate may be subject to capital gains tax. The deceased is considered to have disposed of the property at its fair market value (FMV) at the time of death. If the FMV is higher than the adjusted cost base (ACB) of the property, a capital gain is realized, and 50% of the gain is included in the deceased's income for the final tax return.
Probate Fees
Probate fees are applicable in most provinces and territories when the will is submitted to the court for validation. These fees are based on the value of the estate and vary by province. Although not a tax, probate fees can impact the overall value of the inherited property.
Property Taxes
The beneficiary is responsible for paying ongoing property taxes from the date of inheritance. Property taxes are levied by local municipalities and depend on the property's location and assessed value.
Capital Gains Tax on Sale
When the beneficiary decides to sell the inherited property, they may be subject to capital gains tax if the property's value has increased since the date of inheritance. The capital gain is calculated as the difference between the sale price and the property's FMV at the time of inheritance. The beneficiary must include 50% of the capital gain in their income for the year of the sale.
Steps to Follow When Dealing with Taxes on Inherited Property
Obtain a professional property appraisal: To determine the property's FMV at the time of inheritance, consider hiring a professional appraiser. This will help establish a baseline for future capital gains calculations if you decide to sell the property.
Report the capital gain on the deceased's final tax return: The estate's executor must report the capital gain realized on the property's deemed disposition at the time of death.
Pay probate fees, if applicable: If probate is required, the estate's executor must pay the necessary fees based on the estate's value.
Keep records: Maintain accurate records of the property's FMV at the time of inheritance, expenses related to maintaining and improving the property, and the eventual sale price if you sell the property.
Consult a tax professional: Navigating the tax implications of inherited property can be complex. Seek advice from a tax expert to ensure you comply with tax laws and minimize your tax liability.
Conclusion
Understanding the tax implications of inheriting property in Canada is crucial for beneficiaries to ensure compliance with tax laws and make informed decisions about the property. By following the steps outlined in this article and seeking professional advice, you can navigate the tax responsibilities associated with inherited property with confidence. If you need assistance with taxes on inherited property or other tax-related matters, the team at Tax Heroes is here to help. Contact us for expert advice on all your tax needs.
