Real Estate Tax Consequences in Your Estate Planning

Using real estate in your Estate Planning can have several tax consequences, which can be both beneficial and potentially costly if not responsibly managed. Here are some key considerations:

Capital Gains Tax

1. Principal Residence Exemption:
   • The principal residence exemption can shelter your home from capital gains tax upon sale or at death. This can significantly reduce the tax burden on your Estate.
2. Other Real Estate:
   • For properties other than your principal residence (such as vacation homes, rental properties, or investment properties), capital gains tax will apply on the appreciation of the property value from the date of purchase to the date of death or sale. The gain is calculated as the difference between the property’s fair market value at the date of death and its adjusted cost base. Keep in mind we have new rates in effect this year. Also, remember capital improvements made during ownership may be deductible so KEEP RECEIPTS.

Deemed Disposition

• At death, the Canada Revenue Agency (CRA) considers that you have sold all your capital property, including real estate, at its fair market value immediately before death. This deemed disposition can trigger capital gains tax if the property has appreciated in value
• The capital gain is added to the deceased’s final tax return, and 50% or as much as 67%, depending upon timing of the gain is included in taxable income.

Rollovers to Spouse

• If you transfer real estate to a surviving spouse or a common-law partner, the rollover provisions allow for the deferral of capital gains tax. The property is transferred at its adjusted cost base, and no capital gain is realized until the spouse or partner sells the property or dies.

Probate Fees (Estate Administration Tax)

• The value of real estate is included in the total value of the Estate for calculating Probate Fees. In Ontario, this fee is approximately 1.5% of the Estate’s value over $50,000 which is easy to achieve given the price of real estate in Ontario.
• Holding real estate in joint tenancy with the right of survivorship can help avoid Probate Fees, as the property automatically transfers to the surviving joint owner without going through Probate.

Trusts

• Alter Ego Trusts and Joint Partner Trusts: These trusts allow you to transfer property during your lifetime, deferring capital gains tax until the death of the surviving spouse or partner. This can be a tax-efficient way to manage real estate in your Estate Planning.

• Testamentary Trusts: Setting up a trust in your Will can provide income-splitting opportunities for Beneficiaries and help manage the distribution of real estate.

Gifting Real Estate

• Gifting real estate to family members during your lifetime can trigger capital gains tax on the deemed disposition. However, it may reduce the overall size of the Estate and potentially lower future Probate Fees.

Planning Strategies

• Using a Family Trust: This can help manage and control real estate assets, potentially reduce tax liabilities, and protect assets from creditors.
• Selling Property Before Death: To manage the timing of capital gains tax and potentially benefit from lower tax rates.
• Leveraging Principal Residence Exemption: By designating different properties as principal residences in different years, if applicable, to maximize the tax exemption.

Professional Advice

• Given the complexity of tax laws and Estate Planning, consulting with legal and financial advisors specializing in Estates and real estate is crucial. They can help develop strategies tailored to your specific situation and ensure compliance with tax regulations while minimizing liabilities.

For more information on Estate Law and answers to your questions visit Ontario Probate.ca 

Read more in our latest blog post, Death Taxes in Ontario