Inheritance tax and real estate in Canada: what happens to a home after an owner dies

The original video is in Russian. This English companion explains the Canadian tax concepts behind the topic.

No standalone inheritance tax does not mean no final tax return

A beneficiary in Canada generally does not receive a separate federal bill simply for inheriting a parent’s home. However, CRA generally treats capital property owned by a deceased person as disposed of at fair market value immediately before death. This deemed disposition can create a capital gain on the final return.

The principal-residence exemption can change the result

If the property qualified as the deceased person’s principal residence, some or all of the gain to the date of death may be exempt through the principal-residence rules. Reporting requirements still apply, and the legal representative may need Form T1255.

A transfer to a spouse can receive different tax treatment

CRA provides for a tax-deferred rollover in certain cases when capital property passes to a surviving spouse or common-law partner and the requirements are met. The gain can then be deferred until a later sale or deemed disposition.

What if the home passes to children?

When capital property passes to another beneficiary, the deceased person’s deemed disposition is generally based on fair market value immediately before death. That value often becomes the beneficiary’s starting cost for a future gain calculation, subject to exceptions and special rules.

If the estate owes tax or other liabilities and does not have enough liquid cash, the family may need financing or may have to sell an asset. That is why “no inheritance tax” does not mean “no estate cash-flow risk.”

Ontario Estate Administration Tax is a separate issue

If an Ontario estate certificate is required and issued, Estate Administration Tax is based on the value of the estate. For applications on or after January 1, 2020, the first $50,000 is taxed at $0 and the value above $50,000 is taxed at $15 for every $1,000 or part thereof.

Example: a $1,000,000 parent’s home

You cannot simply multiply $1,000,000 by one “inheritance tax rate.” You need to review mortgage or encumbrances for estate-tax purposes, principal-residence history, other estate assets, whether an estate certificate is required and any income tax created by the deemed disposition.

What families can organize in advance

• an up-to-date will and estate-trustee appointment;
• a clear understanding of how title is registered;
• records of purchase cost and major capital improvements;
• principal-residence history;
• mortgage, HELOC and insurance documents;
• contact information for an estate lawyer and accountant experienced with deceased returns.

Official sources

• CRA: Capital gains when someone dies
• Ontario: Estate Administration Tax