Saturday, July 10, 2010

The basics of capital gains tax and the principal residence


As I've mentioned several times in previous blog posts, Canada doesn't currently have any direct death or inheritance federal taxes. But when a person passes away, his or her estate must pay income tax outstanding as well as capital gains tax.

Capital gains tax is the tax paid on the increase in value of certain assets known as capital property. The type of capital property dealt with by executors most often is real estate, though other assets such as the shares of a privately-owned corporation are also capital property.

Capital gains tax works like this. On the day you first acquire an asset, it has a value (called the adjusted cost base). If we are dealing with real estate, the value is normally the price you paid for the property. Over the time that you own that property, it gains in value. The longer you own it, the more likely that the value will increase. On the day you get rid of the asset - by selling it or transferring it under your Will when you die - it therefore has a greater value than it did when you got it. The difference between the value on the day you got it and the value on the day you dispose of it is known as the capital gain. You have to pay tax on one-half of that increase in value.

As an example, let's say Leia buys a house for $150,000. She owns it for many years and when she dies, her executor is going to sell the house. Now it's worth $550,000. The capital gain on the property is $400,000. Leia's estate has to pay tax on half, or $200,000. This doesn't mean that there is $200,000 in tax owing. It means that $200,000 is added to income for that year on the tax return, and the executor will use as many tax deductions, exemptions etc as he or she can to reduce how much tax must be paid.

If the property was worth less at the date of her death than it was when Leia acquired it, she would instead have a capital loss that she could apply to her return.

This is triggered by Leia's death because in law you are deemed to have sold everything you own one minute before you died. This means that even if your executor is not selling the house but is transferring it to a beneficiary, you are still deemed in law to have sold it at fair market value.

There are some exemptions to the rule about capital gains. The one that is important to most executors is that a person does not have to pay capital gains tax when he or she disposes of his or her principal residence. So if the house Leia owned was her principal residence, the $200,000 would not have to be added to her income.

On the other hand, if the house Leia owned was a summer cottage or a rental property, the tax would be owing.

Your principal residence doesn't necessarily have to be the house you live in most of the time. If you happen to own another house that is worth more, you could designate that more expensive one as your principal residence (don't do this without talking it over with your accountant first!).

A married couple only gets one principal residence between them.

Before taking any steps to avoid capital gains tax by setting up trusts or joint ownership or other ideas, you absolutely must speak with an accountant or estate planning specialist about your specific situation. Often people set up schemes to avoid one thing but they haven't looked at the whole tax picture, such as potential tax hits when a property is transferred from an individual to a trust or to joint owners. There may also be other tax solutions available that you hadn't thought of.

106 comments:

  1. More of a question than a comment really. My dad's brother is the executor of his estate and is claiming that we will need to pay capital gains on the condo dad lived in when it sells. After reading the above I no longer think that's true. Is it? My dad also bought his sister's condo in my & my 2 brothers names in order to help her out. Two of us own homes but the third does not. Eventhough my aunt lives there free of charge, we would need to pay capital gains on this property when we sell it, correct? How long would one of us have to live in this condo as a principal residence in order to avoid capital gains tax?

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    1. If it was your Dad's principal residence, no capital gains have to be paid and there is no inheritance tax in Canada.
      Re. the second condo which the Aunt lives in, the person who does not have a home yet could designate this as his principal residence (review the designation on principal residences forms to make sure it applies)and no tax would be payable on sale by him but if you are owners in common (not joint), the other two may have to pay capital gains on two thirds of the gain. You should keep track of the purchase documents of your Dad to establish the cost plus all the taxes and legal costs which are part of the adjusted cost.

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  2. Great blog. My mom just asked me to try to figure out if she could move into her rental property to try to avoid taxes. I told her she needs to talk to an accountant but of course she didn't take my word for it! Thanks for the post!

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  3. Hi Andrew,

    You're welcome and you're absolutely right that your mom needs to talk to an accountant before making an important move like that.

    Lynne

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  4. Hi,
    let me first appreciate for this very helpful blog. My husband passed away(at age 35) 50 days ago and we didn`t still havechildren. there is a house under his name which we used to live in and a house of mine( revenue prperty). His parents pushing me for give them their 1/3. I would like to know I have to pay capital gain tax on both propert? or principal residence which is under his name will be excluded? how about the propert which is under my name and will be include in seccession! Do I need to pay capital gain tax on this one? Thanks for your response.

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  5. In order to assess the capital gain, we have deductions & exemptions as you noted previously. My question is: can property & school taxes be used as a deduction? What other deductions are allowed or more importantly, which deductions are not allowed. Thanks.

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    1. This is definitely something you should ask an accountant, not a lawyer.

      Lynne

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  6. Is there a limit on the amount of times you can sell a principle place of residence within a given time period, realizing a profit each time. Is there a limit on the amount of profit realized selling a principle place of residence in any given tax year.

    ReplyDelete
    Replies
    1. This is something you might want to ask an accountant.

      Lynne

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    2. Yes...house flipping is frowned upon by the CRA and the case law stems from Happy Valley Farms Ltd. (1986).

      That decision established the following criteria to look at: (1) the nature of the property sold, (2) the length of the period of ownership of the property, (3) the frequency or number of other similar transactions by the taxpayer, (4) the work expended to make the property more marketable or to attract purchasers, (5) the circumstances responsible for the sale of the property, and (6) the taxpayer’s motive or intention at the time he acquired the property.

      Delete
  7. i own a condo in toronto, which i rented when i moved in june 2012 of this year. I moved to alberta where i bought another property for living.

    I bought the condo in 2010 in toronto for 305k. When I left the condo and rent it the fair market value of the condo was 350k as appraised by the appraisor. Now I am looking to sell the condo. Quiet likely it will sell for 360k.

    Would the capital gain be on 360k-350k.

    Please advise?

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  8. I purchased a new house several years ago and have always paid 100% of the mortgage, property tax and maintenance etc. I am also the sole resident of my house. On paper however, my mother is on the title of the deed under "Joint Tenancy" but has never lived with me nor made any monetary investment in my house. She and my dad live together and have their own house - so her principle residence is with my dad. If by mutual agreement my mom and I would like to have her name removed off title of my house without having to sell or dispose of the asset, would she experience a capital gain? The house would be refinanced soley under my name. Thanks.

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  9. Question, My father and his sister own several rental properties together. In the event of my father's death, these properties are left to my aunt.

    Is there a chance that my mother will be responsible for the capital gains tax payable or would my aunt be the one responsible to pay this.

    Also would the capital gains tax be calculated at 50% of my fathers' share?

    Thank you.

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  10. i bought a vacant land adjacent to my house in 2005 and just recently sold it.do i have to pay capital gain tax?Thanks!!!

    ReplyDelete
    Replies
    1. Hi,
      If you sold the land for more than you paid for it, then yes you will have to include the gain in your income tax return. It's always worth it to run this kind of situation past an accountant who knows all of the ins and outs of tax.

      Lynne

      Delete
  11. I own a property in BC, as Joint Tenants with my husband. Can I add my two sons as Joint Tenants or can I sell my share of the property to my two sons? My husband does not want a divorce (yet he is philandnering)- so I just want to get my name off this property and make sure that he does not get all of the property. Thank you.

    ReplyDelete
    Replies
    1. It sounds as if you have several procedural type of questions about changing the title to your property. I recommend that you go to the "interesting links" section of my blog and look for the link to the BC land titles office. You will find information there about changing titles.

      But please be warned that there may be unforeseen consequences to any actions that you take. For example, if you add your two sons (who must be adults to be added), you could lose the entire property if one of the sons were to get divorced. There may also be tax consequences on transfer of property.

      You would probably do well to sit down for an hour with a local family law (not estate law) lawyer in your area to learn more about your options.

      Lynne

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  12. My husband died after being very ill for a number of years. We always intended to put my name on the house title for our marital home which we lived in for 10 years but just never got around to it. He did have a will and left everything to me as his wife and there are no other beneficiaries and it states clearly in the will the property address(our home). I did pay probate taxes on the home because someone told me I had to do that as I was not on house title even though it is our home and he left the home to me as his wife in the will.

    I am also the executor and filed his final income tax return already but did not put our home on it as a capital gain. Should I have claimed it somewhere on his final return or should I file a T3 trust return for his estate as the executor. Apparently I only have till March 15th 2013 to file anything else I may have overlooked or owed to CRA.

    Also, How long do I have to change title on our home to myself. IS there a legal time frame in Ontario. Is there tax implications when doing that. The mortgage was also in his name only and I have just continued to make the payments for the last year and pay the property taxes. I did notify the mortgage company as executor that he had died. The payments just come out on automatic debit from our joint account. I think this is a great site for folks that need help and don't have much money to get legal advice.

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  13. When I first left my husband after 25 years I had no money, no credit and could not get a mtg or a loan etc. My sister bought a small house in her name for me to live in. I pay the mtg and the bills. The arrangement being that when I settle with my ex that I will buy the house for the same cost as she paid. I have put about $25 000 in the house and the profit on sale right now would be about $50 000. I am thinking of moving - my question is how best to do it without negatively affecting my sister. Is it better to have her sign over the house to me and pay the land transfer tax and then sell the house or is it better to sell the house while still in her name. I am prepared to take any hit but am not prepared to have her suffer any loss due to her efforts to help me.

    ReplyDelete
    Replies
    1. I appreciate your question, but it really isn't about my area of expertise, estate planning. This sounds more like something you might run by an accountant.

      Lynne

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  14. I was renting and working in a place where I could not purchase a home. Real eatate prices were rising rapidly. I purchased a legal duplex in a city 3 hours away and rented it. I hoped to move into it when I left the job I was working at. My mother became ill and I ended up buying in another city with the intention of having my mother come and live with me so I could look after her. She was not here long when she had to go into care as she had Alzheimer Disease. Now we have jobs in this city and a PR here. I am wondering about moving into the rental when I retire and making it my principal residence. Will I pay capital gains if I sell the PR I am currently living in? I have 9 or 10 years before retirement. Do you have any suggestions or answers for me?

    ReplyDelete
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    1. You can have one principal residence at a time. So you could sell the one you're living in without paying capital gains tax, then move into your other house. That other house could become your principal residence, and when you sell it, again you won't pay any capital gains tax. Now this would be totally different if you sold them both at the same time (or you passed away and both of them were in your estate) as only one can be the principal residence.

      Lynne

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  15. My sister, brother and myself are joint on my grandmothers home. She has to go into a nursing home soon so we need to sell the home. We all have primary residences and would like to avoid heavy taxation. She we revert the home back to here either by signing off or having the deed changed. How would the capital gainds be figured out, she has owned the home for 40 years but we were on added about 2 years ago.

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    Replies
    1. The time to "avoid heavy taxation" is before you put everyone's name on the title. Now you're trying to close the barn door after the horse has already escaped. Whether it's sold to a third party or transferred back to her, the impact is the same. Your best bet is to talk to an experienced accountant.

      Lynne

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  16. My mother's estate owned her principal residence until its sale, 14 months after death. Is the house subject to capital gains tax in the hands of the estate? Is an appraisal at the time of death required to establish an ACB for the estate?

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    1. As a general rule, yes an estate is liable for capital gains that accrue while a property is in the estate. Ideally there would have been an appraisal done near the date of death, but not all executors realize they should do that. If there is no appraisal available, you might end up relying on the value stated in the estate inventory, as that has at least been sworn to as an accurate value by the executor.

      Lynne

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  17. My Mom sold her rental property in 2012, she will need to pay the capital gains on the sale of the building as she was a resident in the building. Can the gains tax be paid in installments or does it have to be paid in full by April 30?

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    Replies
    1. Hi. I don't really see what being a resident in the building has to do with anything. You may be operating with some incorrect information. I think you should get an accountant to look at this before you conclude that capital gains tax is owed.

      Lynne

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  18. Lynne, My mother just passed in Dec, she lived in a condo, as executor, I am in the process of selling the condo, because this was her principal residence, and the money goes into the estate, is there capital gains on the sale of the condo????

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    Replies
    1. Hello. If it was her principal residence, then no there will be no capital gains tax on the sale of the condo.

      Lynne

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    2. Lynne, this is not what the accountant has told me. We live in Ontario does that make a difference.

      Delete
  19. No, province of residence doesn't make a difference as capital gains tax is federal. However, all I've got to go on to answer your question is one sentence and I have to take your word for the facts. I haven't seen any paperwork. I presume that the accountant has a heck of a lot more than that to rely on. If I were you, I'd listen to the person who has the full information. If you really don't like what the accountant is saying, take your paperwork to another person for a second opinion.

    Lynne

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  20. Is there a time period after which a property is exempt from capital gains. My mother and father owned a house and cottage at one time after my dad passed away she sold the house (more than 20 years ago) while keeping the cottage. So the cottage then become her principal residence. She recently passed away do we have to pay capital gains on the cottage or has it become her principal residence?

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    1. It is perfectly alright for another property to become the principal residence in a situation like you describe here. It's not because time has passed, it's because we are all entitled to have one principal residence at any given time. Remember, it's always best to ask an accountant about taxes.

      Lynne

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  21. What are the tax benefits of a trust in terms of potential capital gains? Thank you

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    Replies
    1. That's a pretty broad question. Are you talking about inter vivos trusts or testamentary trusts? Alter ego trusts? Who would be the beneficiaries of the trust? What property - real or personal - would be placed in the trust, by whom, and for how long? Seriously, I could write a book about this.

      Lynne

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  22. Hello,

    My father passed away suddenly 11 years ago and we found out only a month ago that his name is one of two names on the title on a house in the city of Toronto. The other person is an estranged cousin who now claims to not have known about this arrangement. The house was purchased in 1979 and the cousin still resides there. My father did not tell anyone about this. My father's cousin now wants to sell the house. What needs to be done since my father's name still exists on the title? My widowed mother is still alive but she wants no part of the proceeds of the potential sale of the house.

    ReplyDelete
    Replies
    1. Are the two names on the house joint tenants, or tenants in common? This will determine what steps need to be taken. I'm going to have to assume a few facts to answer this question.

      If the title is jointly held there is a right of survivorship and the cousin needs to take a copy of the death certificate to the land titles office to have your father's name taken off the title. If your cousin had spoken with a lawyer, he would already know to do this, so either he hasn't talked to a lawyer or the title isn't in joint names.

      If the title is held as tenants in common, which is likely to be the case, your father's share of the house belongs to his estate. It's good news that the cousin wants to sell the house as it's pretty darn hard to do anything else with half a house.

      Your father's executor will have to sign transfer papers so that the house can be sold. It will likely require your father's will to be probated, if it has not already been probated.

      I understand that your mother doesn't want to receive the proceeds of the house. However, if she is the executor of your father's estate, she is legally obligated to sign the papers that will allow the house to be sold. She will then receive the funds on behalf of the estate and distribute them according to your father's will.

      If she was the beneficiary of your father's estate, then she can take off her executor's hat, put on her beneficiary's hat, and give the money back to the cousin if she wants to.

      There should be a lawyer handling the sale of the house. This is not a simple sale and I don't recommend that you guys try to do this without advice.

      Lynne

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    2. Thanks for the detailed information Lynne

      Delete
  23. We built a house last year as an investment. It has been our principle residence for 6 months now. Can we sell it and still avoid capital gains? By reading what you said above I assume we can.

    Thanks!

    ReplyDelete
    Replies
    1. Anyone can sell their principal residence without incurring capital gains tax. If you're not sure if it's your principal residence (for example, if you own another home as well), perhaps talk to an accountant.

      Lynne

      Delete
  24. My brother passed away this April. I wad named Executor of his estate. I have since sold the property. I do not own my own home. I currently rent. Do I pay capital gains on this property once the new owner takes possession.

    ReplyDelete
    Replies
    1. Hi,

      I wonder if there is a piece of information missing from this question - that is, whether your brother's house was given to you and put into your personal name. Did you sign the sales agreement as executor, or as you personally?

      You said that you are the executor and that you sold the house. If so, none of this should have anything to do with your personal tax situation. The transaction that is being taxed is the sale from the estate to the buyer. If it was your brother's principal residence (and if he only owned one house, let's assume it was), then there should be no capital gains tax arising.

      However, let's also look at the situation as if the house had been transferred to you personally. From what you've said, this would have been the only real estate that you own. You could declare it as your principal residence, in which case you would not pay capital gains tax on the sale.

      Lynne

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  25. Hi Lynne - my father owns a farm which was assessed recently so we know what it is worth. My question is what should he have in place re lawyers and accountants to avoid paying the government as less as possible. He has named me and my brother as executors of his will but has not assigned us power of attorney. I just want to make sure that all the paperwork has been completed before he passes on.

    ReplyDelete
    Replies
    1. Farms are particularly vulnerable to capital gains tax because they are land-rich and not particularly liquid. There are special rules in place for farms in Canada that are designed to eliminate capital gains tax which might otherwise put a farm out of business.

      This is called a farm rollover. It's available when a working farm is being passed on to the next generation as a working farm. You can get ton of details about this by reading Canada Revenue Agency's information about farm rollovers.

      If you and/or your brother are planning to carry on with the farming, perhaps you and your father should talk to an accountant to find out whether the farm rollover is available to you. If it isn't, it's quite possible that some of the land will have to be sold after your father's death to pay taxes.

      Naming executors and powers of attorney is of course a good idea, but it won't do anything to lower taxes.

      Lynne

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  26. Hi,
    my father passed away and owned a non working farm as his primary residence. I will be buying his farm shortly and selling my current primary primary residence eventually in the near future. My question is, should I claim the farm (once it's transferred to me from the estate) as my primary residence and just call my current home my secondary residence until I sell it? Will I need to pay any capital gains? thank you

    ReplyDelete
    Replies
    1. If you own more than one property, it's possible to choose which one to call your principal residence. It doesn't necessarily have to be the place you spend the most time. However, there are some rules attached, so I think your safest route would be to check with an accountant before making a change of designation.

      Lynne

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  27. My parents owned a home and a cottage and made a capital gains claim in 1994 on the cottage. Since then my father passed away and my mother sold the house, moved into an apartment for three years, then moved in with a sibling until she was no longer able to care for herself and recently passed away in a nursing home. during this time she maintained and owned the cottage. When calculating the capital gain on the cottage are any of those years since 1994 exempt from capital gains? I am wondering if in this case the capital gain for the cottage would be calculated by taking the ratio of the "number of years owning both properties since 1994" divided by the "total number of years" and applying that to the capital gain during that period.

    ReplyDelete
  28. Hi,

    My father wants to transfer his rental property (fourplex) to me now. I just want to confirm the obvious. There will be an ~300k$ capital gain of which they will end up paying on 50$ of that... which is 150k$...and the capital gain tax will be ~60k$
    Are my assumptions correct?

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  29. Thanks for this useful article. Sometimes we can be totally ignorant about such things because we do not anticipate death for our loved ones or for ourselves. Now I know a thing or two about the tax gains and who I should consult should there be a death in my family. We have a house that the rooms are rented out as storage. I wonder what the tax gains would be upon our demise.

    ReplyDelete
  30. My Father owns a Farm (80 acr.) and would like to add me, his son, to the title. This would be for the purpose of being able to build a home on the land (get a mortgage) and to support them as they age. We were told that to add me to the title that Captial Gains would be applied. What do you know on this matter? Can my Father add me to title and then determine how much land he wants to sell/gift, 1-3 Acres and then pay capital gains on only that amount? Would the above "Farm Rollover" scenario fit in our situation? Or are there other options for transfering farm land to a child that qualifies for a postponing of any taxable capital gain?

    ReplyDelete
  31. I inherited my dads cabin in 2005/6, this was his primary residence. My husband and myself own our home in the city, so I am half owner. I am thinking of selling my cabin, which was worth about $75,000.00 when I inherited it. Now it may be worth $200,000.00. How much capital gains might I have to pay?

    ReplyDelete
  32. I live in Ontario and have a property i Quebec - it is an old school house to which I added an addition - 2 story - winterized, put in a well, septic system, electricity, plumbing, - now I would like to sell the property (77 acres) in Quebec (this property was willed to me by my Father in 1981)and would like to know how to avoid Capital Gains as mush as possible - any suggestions?
    Confused?

    ReplyDelete
    Replies
    1. I'm not an accountant by any means, but I will say this. Your capital gains tax is calculated by deducting the Adjusted Cost Base (ACB) from the current market value. Obviously you want the gap between the two to be as small as possible.

      That gap can be reduced if the ACB can be increased. In your case, it's important to understand that the ACB can be increased by adding in the cost of improvements. You obviously did a lot of expensive work, and the cost of that is added to your ACB.

      This is something you might want to talk to an accountant about, as the accountants know more about tax than I do.

      Lynne

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  33. Our home was destroyed by fire and rebuilt through an insurance claim. At one point the home was not our primary residence but it had been for the 10 years before the fire. If we were to sell the house, which is currently our primary residence, would there still be capital gains on the property that was destroyed for the period when it was not our primary residence?

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  34. I am executor, power of attorney and power of attorney for real property. I am sole benefit as well. (friends estate no family or children). Another friend wants part of the estate. No previous will. Can they contest the will to include themselves? They have been friends for 20 years and gave my friend money over the years to help her pay some bills. they also helped pay back taxes on her property because of financial difficulty. Nothing was mentioned in the will about any loans.
    just states she leaves her estate to me including real property to do with as I see fit.

    ReplyDelete
  35. Hi Lynn my husband and I live in a condo that is in my daughters name. My daughter does not own any other property. She is now married and is moving to the USA permantly. She is applying for a green card once in the USA. We plan on living in the condo. Since my husband is very ill and I will likely move out of the condo does my daughter have to pay capital gains on the condo when we sell if she us living in the USA and can she claim this as her primary residence. She lived her with us awhile ago but has moved out to be with her husband.

    ReplyDelete
  36. Hi Lynne,
    How are capital gains treated if you receive a cash settlement due to a fire on a rental property...but you are keeping the land? as you have not technically disposed of the property. would all or a portion be triggered now? or later (deferred)? assuming land is sold/gifted 25 years down the road?...also, what if a subdivided lot was sold along the way? thanks:)

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  37. Hello I have a question about this capital gain. My dad passed away dec 29th 2011, in his residance. My Uncle is the executer of his will. We are now 2013 almost two years later and he is all of a sudden mentioning this Capital Gain even though he already did my fathers final taxes and his as well. Now is Capital taxes just the house or would that include compensation and rsp's etc.. Also when he did the final taxes why wouldn't the capital taxes be brought up that year? I just think my uncle is just trying to screw me and my step mother around..

    ReplyDelete
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    1. At the time your Dad passed away, if his home was his principal residence (and it sounds as if it was) then there would be no capital gains tax on the house when it moved from your Dad to the estate.

      It sounds to me as if the house is still in the name of the estate. If the house has been in the estate for two years, it may have increased in value during that time. If so, there will be capital gains tax on that increase. He is probably just now realizing this.

      Your uncle may have done your father's final taxes, but he also needs to file a tax return on behalf of the estate every year that the estate is open (it is a T3 return rather than a T1 return). He can't finalize the estate taxes while the estate still owns capital property.

      I have to wonder why your uncle kept the house in the estate for two years. If there was a good reason arising from the estate itself, then the estate should pay the capital gain tax. If there was no good reason then you might consider insisting that your uncle pay the tax. After all, if he had sold or transferred the house within a reasonable time, there would be no capital gains tax on the house at all.

      There could be capital gains tax on an RRSP, depending on what type of investments are held in it. This is something that would have to be sorted out by an accountant or a financial advisor. However, I suspect that in your case the capital gains tax arises just from the house.

      Lynne

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  38. I am about to buy a second house for my son, where has going to stay, he is 28 and working, in case we want to sale the second property few years later do we have to pay taxes for the gain ?
    Thank you,

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    1. This comment has been removed by the author.

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    2. If your son is the "beneficial owner" and you are merely the legal owner (your name on title to satisfy a mortgage company) then he utilizes the Principal Residence Exemption and no capital gain tax becomes owed. It's all here:
      http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s1/f3/s1-f3-c2-eng.html#N11105

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  39. When my grandfather passed away his house was left to my father, then when my father passed away in 2006 the house was left to my mother, she now wants to sell the house and use the money to buy another house which I would move in to and have both our names put on in case of her death. Does she have to pay capitol gains if the money is used to buy another house?

    ReplyDelete
    Replies
    1. If your mother owns a house and it is her principal residence, she does not have to pay capital gains tax on its sale, no matter what she uses the money for. If she sells her principal residence and buys another house, that new house can become her new principal residence.

      Lynne

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  40. My husband and I separated over a year ago and I stayed in the marital home and he moved into our rental property. Can he now claim that home as his principal residence? What happens re: capital gains if/when either of us sell?

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    Replies
    1. Your best bet would be to discuss this with an accountant rather than a lawyer. They are the ones who know the tax rules the best.

      Lynne

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  41. Hi Lynne,
    my parents have owned a home for several years. they both have recently entered a nursing home and have decided to sell this home, which is their only home. in order to avoid capital gains tax is there a time limit in which to sell before this home is no longer considered their primary residence. or would it be better for them to gift the home to their adult children and have the children sell it for them asap. children do own homes of their own

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  42. The phrase "principle residence" is not the same as "where you live". The definition is more complex than that, and involves ownership of the title of the property. The fact that your parents are living in a long term care facility does not necessarily change the fact that the house is their principal residence, as long as they still own it and it isn't rented out to anyone. That being the case, there would be no capital gains tax when they sell it.

    If they aren't going to use the house any longer, I agree that it should be sold and the proceeds invested by your parents.

    I wonder why they would gift it to the children before selling it. That just seems like a lot of paperwork and trouble for no gain whatsoever,, not to mention potential tax problems for the children if the house takes some time to sell. If you are under the impression that going through the children somehow eliminates capital gains tax (assuming there is any), you are completely wrong. The tax is assessed against the house disposition - not the house purchase - so it wouldn't matter if the house was given to the kids, sold to a complete stranger, or became part of your parents' estate. The tax effect is the same.

    I wondered briefly whether there was a concern with dementia that might prevent your parents from selling the house. However, if they have the ability to transfer the house to the kids, then they have the ability to sell it.

    Lynne

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    Replies
    1. Thank you Lynne for this invaluable blog. If I understand your response on the subject of selling a parent's principle residence after they've been moved into a retirement home - there is no time limit before Capital Gains would have to be paid? I had formed the idea that the home would have to be sold within 12 months of their moving into a retirement residence.

      Delete
  43. My husband and purchase 160 acres 25 years ago and built a home on the land and farmed. For the past few years we have rented out 90 + acres for farm use
    ( remaining is pasture and house & yard). Now we are subdividing and selling 150 acres. What are the tax implications and is there any exemptions.

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    Replies
    1. First, thank you very much for publishing your blog, there is a lot of useful information here. I have a quick qeustion as well, i was told by a tax accountatnt, that although there was no real property. estate tax would need to be paid on the pension payout from the deseased employer. Is this correct? Thank you in advance for information you can provide.

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  44. My name is in joint title with my mother for a property in Ontario. My 1991 my dad had an illness and I gave him money (approx. 1/4 value of the then marker value of the property) so that my parents could keep there/our family home. My dad wanted to protect my interest and had me listed on title as a joint tenant. Since 1991 I have given my parents approx. 15,000 a year so that my parents could stay in the home and maintain the home. Five years ago my dad passed away. Two years ago my mom was forced into a retirement home with dementia.

    I have lived in the house for the past two years fixing it up to sell. I have put approx. 100,000 into fixing up/modernizing the house. As I was living in the house I listed the house as my permanent residence for income tax purposes in 2012 and 2013. I had thought that I could wait for my mom to pass before selling the home but I feel pressured by siblings to sell the home.

    I have another home in the US and I went to the US in the fall 2013.I am back and forth every second month to check on the house and my mom who is still alive in the retirement home.

    I am listed as the Power of Attorney and I am executor of her will.

    My question is if I sell the house this spring, executing as Power of Attorney on behalf of my mom, will there by any capital gains?

    If I execute a Transfer as Power of attorney for my mom and on my own behalf will I have my siblings sign off?

    Sorry for the long note. Thank You

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  45. Hi, I have a question about capital gains and tenants in common. My grandmother recently died. The house she lived in also had my mom and aunt on the title. My grandmother put their (mom and aunt) names on the property shortly after my grandfather died in 1992. It was the primary residence of my grandmother until her death but both my mom and aunt own their own homes. My mom and aunt didn't know the form of ownership they had previously but according to the land title office it is held as equal tenants-in-common 1/3 for each my grandma,mom and aunt. Now my grandma's 1/3 needs to be put into probate. My question is how will capital gains will be applied in this situation in terms of both my grandma and mom/aunt. To illustrate I will provide some approx figures.

    Appraised value of property when my parents were put on title in 1992 - $200000

    Appraised value at my grandmothers death and - $450000.

    After probation my mom and aunt do plan on selling the property.

    ReplyDelete
    Replies
    1. Hi John,
      With the numbers you provided, the capital gain is 250,000. Half of that, or $125,000 is taxable. That is roughly $41,000 each. Your grandmother's third will be exempt from capital gains tax. However, the other two owners will each have to add $41,000 to their income on that year's tax return. It would be a good idea to talk to an account before filing those returns, to see what can be done to reduce the tax.

      Lynne

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  46. This is a wonderfully informative blog and you are doing a tremendous public service, thank you Lynne.

    I have a tricky situation that I wish you could help me with. I am a widow and own three homes outright. I live in one, my daughter lives in one and my son lives in another. My daughter and son do not pay rent and they have lived in the homes for many years. This is my question: when they inherit the properties how can I minimize their Capital Gains? These properties are their homes and I would hate to see them lose them.

    Many thanks if you can help.

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    Replies
    1. Thanks Jeannette. I'm glad you find the blog useful.

      I assume from the wording of your question that your name alone is on the title to each of the properties.

      Understand that the capital gains tax on the two properties your kids live in is to be paid out of your estate. Your kids don't pay it themselves. Therefore, if there are other assets in your estate, those assets can be used to pay for the tax so that the homes themselves don't have to be sold to pay tax. For example, the home you live in is presumably going to be sold after you pass away, so that would provide liquidity to pay for tax. Bank accounts, investments, and vehicles could also be used to pay capital gains tax.

      I don't know whether you have life insurance, but I would guess that if you do, you've named your children directly as the beneficiaries. You might consider changing the beneficiary to name your estate in order to provide extra liquidity in your estate. Please talk this through with your life insurance provider before going ahead, as there may be other advantages to leaving it as it is.

      If you are thinking about putting your children on the titles to the homes, please realize that this will not help with tax, and in fact might just make things worse. The change of title to add one of your kids is considered a disposition, so the property would be taxable now. You'd have to come up with the money now.

      Lynne

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  47. A relative has died and we have inherited a part of the estate, (US securities)
    which was divided through a probate.The administrator had kept the securities for a while
    and then sold them when they lost value.A part of the estate was then also a capital loss.
    Can we claim this loss?
    We have called CRA and they say one thing one time and different next time.

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  48. My mother has past away recently and has left her house and property to her four children. The house is sitting on 9 acres and was a little hobby farm when my father was alive, and has not been farmed since, my mother had lived in the house until her death. My parents had lived in this house for over fifty years.
    My question is....we are planning on selling the house and property as a whole once the will is probated....will we have to pay capital gains when we sell?

    ReplyDelete
    Replies
    1. Yes, it's my understanding that the estate will have to pay capital gains tax on the sale, but not on all of it The portion of the property that qualifies as the principal residence will be exempt. This will not be all nine acres. The property does not qualify as an active farm, so will not be exempt from capital gains tax on that basis. Your best move would be to hire an accountant with some experience in estate and tax matters, and ask him or her to handle the tax aspects of the estate, including this sale.

      Lynne

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  49. My wife and her two sons moved into my house when we got married. Her sons are now adults and moved out. If my wife dies,can her sons claim half our marital assets, including the house I brought in the marriage?

    ReplyDelete
  50. Hi there,
    My mother passed away in January and left her assets evenly to her 4 children. We are just getting to probate now as one of my brothers is brain damaged and his share was left in trust.
    My question is complex I think. My other brother is the executor and has moved into my mothers house (no mortgage on the house). Is there any repercussions to him living there? ie - possession is 9/10 of the law?
    Also it has been agreed by all that the house is to be sold and the proceeds be distributed evenly between the four of us. Do we all sign off on the selling price or is that solely the executors decision?

    ReplyDelete
    Replies
    1. It's up to the executor to accept or reject any offer on estate assets. The rest of the beneficiaries don't sign off on it at the time the house is sold. However, at the end of the estate, the executor will likely ask the beneficiaries to sign a release that approves of all of his transactions as executor. If the house had been sold at too low a price, a beneficiary might use that opportunity to object to that price.

      Possession being 9/10 of the law has nothing to do with your brother being in the house. He's an executor. If he is causing a financial loss to the estate (e.g. loss of potential rent income, depreciation of the property) then he should be held responsible for that. If he is unable to act in a way that benefits the estate rather than himself, perhaps he needs to be removed from the job of executor.

      Lynne

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  51. Hello, had a quick question regarding capital gains.

    My father owns two properties and had recently just sold one. The one we sold was an investment property and we did make a profit on it. I was wondering if he were to reinvested in the same year & were to transfer that title to me (his son) as a gift, would either of us still owe capital gains?

    ReplyDelete
    Replies
    1. How did "we" make a profit on something your father owned? I assume that "we" means the executors. Your approach of mixing the players together here is clouding your view of the issues.

      You don't owe capital gains tax; the estate does.

      The capital gains tax is not on the gift to you; it is on the transfer of the property out of your father's name and into the estate name, so what happens to the proceeds of the sale after that doesn't matter and will not eliminate the capital gains tax.

      Your best plan for reducing taxes is always to talk to an accountant.

      Lynne

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  52. My father recently died. He owed 2 homes outright and sold one to his future wife. They became involved and married with a prenup, All assets prior to the marriage belong to the individual who originally owned it. She sold her house to her daughter and moved in with my dad. She says that although she gave my dad 1/2 the money for their marital home, her name was never added to the title.
    We just have her word for it so far. Anyway, they ended up buying a condo months before the house was finally sold. Now we are dealing with the will, specifically paying the capital gains on the house. If the house became hers the instant dad dies even though her name isn't on the title, who pays the capitol gain on the house? His wife or his estate?

    ReplyDelete
  53. My father recently died and I have several questions. He owned 2 houses outright, one being his principle residence. He sold the second to his friend who sold it prior to marryng my dad. They had a prenup, all existing assets belonged to whoever previously owned them. His wife claims she gave my dad 1/2 the cost of the marital home after she moved in but her name is not on the Title. Eventually they bought a condo before the sale of the house was finalized. My questions are: Does she now own the house? Does she have to prove she paid for 1/2 of it? If she does own it now, doesn't she pay the capitol gains on it? Or does he estate still have too? Thank you!

    ReplyDelete
  54. Anonymous
    I have recently sold a duplex. Our renter past away two years earlier and the one unit has was vacant for two years. Do I still have to pay capital gains on half the duplex or can this be classified as single residents?

    ReplyDelete
  55. I am joint tenant with my sister for an apartment. We have lived in apartment for 5 years. I will get married within the year and plan to buy a place with my future husband.

    What should I do about my current apartment with my sister, to have less taxes in the future?

    ReplyDelete
    Replies
    1. This is not an estate planning question, unless you want to interpret "in the future" to mean when you pass away. I'll answer that bit, and for the rest, talk to an accountant.

      If you and your husband buy a place and your name is on it, and you also own a place with your sister, your estate will be taxed when you pass away. This is because only one of those properties can be your principal residence, and therefore free from capital gains tax.

      If you sell your portion of the apartment that you own with your sister while it's the only property you own, there will be no capital gains tax on the sale because it's your principal (and only) residence. Then when you buy something with your husband, that new property can become your principal residence.

      Lynne

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  56. Hello Lynne, I like your blog, very helpful answers. Just a question, I have a good friend who owns a farm. He is single, divorced 10 yrs ago. His land and buildings are worth 3,000,000 and he wants to sell it. He purchased the farm for about 1,000,000 about 20 years ago. At that time there were 2 good houses on it and he added a farm building of about 500,000 about 15 years ago which is now depreciated quite a bit. What is better for him, sell it now and pay capital gains, or keep it and pass it on to his children, who will sell it after his death. How much capital gain would he have if he sells it now for 3,000,000? How much taxes/capital gain would his estate have to pay if he would pass away this year and he did not sell it before he died? If his children inherit the farm this year and sell it right away, would there be any taxes for them? I tried to give you as much details as possible. Could you give me a calculation example using the values I provided? It makes things clearer to me when I see the actual calculations. Thanks from Ron.

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  57. Hello Lynne;
    My parents are both in long term care and wish to sell their one and only principle residence, and distribute the proceeds from the sale amongst their five children, to help in relieving a heavy estate tax. Is this possible and what are the procedures involved? Also, what tax implications are involved in this to my parents or her five adult children? I look forward to your input.

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  58. Hello Lynne
    I recently moved from my house into an apartment .My son and his wife sold their home and moved into the house which I own . The title is presently in my name only . I am considering changing title so my son , daugher-in-law and myself are joint owners . Would this house be the principal residence of all three people on title ?

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  59. My mom got some land from her deceased dad. She wants to sell an acre of the land and the executor wants to help her. Does he have to get her certificate of title in his hands to help sell the land?

    ReplyDelete
    Replies
    1. Not necessarily. The days of needing the physical copy of the deed are gone. The first step that anyone takes when selling some land is to do a title search at the land titles office. That provides the documentation needed.

      Lynne

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  60. I am single, own my home, no mortgage, principal residence, no children. I want to live here until I die and when I die, I want my excecutor (brother) to sell my home and distribute money to heirs. Does he have to pay capital gains. What should I do

    ReplyDelete
    Replies
    1. When you pass away, there is no capital gains tax assessed against your principal residence.

      Lynne

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  61. dear Lynne, an uncle co-signed a with my wife a while back to secure a mortgage where my wife and live as our primary residence . He had his own residence but was sold a while back due to moving to a retirement home. We have renewed our paperwork to remove him now ( deed+ mortgage) and he has gifted his portion to us on paper. We don't want to sell as it is our primary residence. Will my uncle be penalized with capital gains tax ? or will my wife and I when we sell our home? thank you

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  62. Hello you have a fantastic blog hear my mother and father own their own home my father passed away five years ago my mother inherited the whole from him or at least that now it's in her own name from October 2013 until April 2014 she's had a fall and remained in hospital was unable to return home and was moved to residential care where she pays 80% of her government tap her government pension to pay for her care at the home month ago she sustained a fall and now needs extensive physiotherapy and does not have the money to pay for that my niece is moving out on November 15 and thereby will negate my moms house insurance that state someone has to be living there I would like to rent my moms house out to family friends for half the market value in order to keep her house insurance intact until it goes up for sale in February 2015 and also to give her money to pay for her insurance as well as her physeal that's much-needed when my moms house is sold in the early part of 2015 will she need to pay capital gains tax I have been told two things number one the capital gains tax will be on the difference in value between April 2014 and when it's sold and she would pay the tax on that increase in value if there is any I have also been told that because she's a senior and and residential care and hasn't bought another residence she has until December 31, 2015 without paying capital gains tax could you please tell me if renting your house out for these for five months negate her getting a capital gains tax exemption thank you very much you have an awesome blog here

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  63. My father passed away a widower 2 months ago. He left our family farm and assets to my brother and I. My brother wants to take over the farm and buy me out. The property is worth approx. $500K. Would we have to pay capitol gains on the full portion or half of it.

    ReplyDelete
    Replies
    1. When a family farm passes from one generation to the next, it's possible to roll it over to the new owners without any capital gains tax being incurred. There are restrictions on the eligibility, such as the previous owner (your father) and the new owner (your brother and you) must actively be farming the land. I assume that you took advantage of this rollover when the farmland was transferred from your father. That being the case, the only capital gains tax that should accrue should be calculated from the date you took possession of it until the date you sell it to your brother, which is less than two months. So the amount should be small, but it will apply to the whole transaction, not just half. Having said all of this, I suggest that you confirm this information with an accountant, as they are the ones who are best at tax.

      Lynne

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  64. We have lived in our house for 40 years, and decided to move to another city. We have purchased a house in the other city and will move to it soon. We have not yet sold the house we live in now, and wondered how the capital gains exemption for sale of a pricniapl residence lasts. Will the new house be considered our principal residence? -and so require us to pay capital gains when this house is sold?

    ReplyDelete
    Replies
    1. The old house will continue to be your principal residence until you declare your new one to be your principal residence. You can own both of these properties at the same time for a long time if you like, and may continue to call the old one your principal residence for as long as you like. You don't have to live in it full time for it to be your principal residence, but be careful because if you rent it out you may lose the opportunity to call it your principal residence. Most people indicate their principal residence on their tax returns. It would be a good idea to sell the old one before you change the principal residency to the new one. As always, I suggest that you talk to an accountant about your specific situation, as accountants know more about tax than most lawyers (including me) do.

      Lynne

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  65. Hello, I would like to know if capital gains taxes have to be paid on a principal residence, I was reading what you wrote at the beginning of this page and then later on, dated April 29, 2012 you answered a question saying that if it was a principal residence there are no capital gains taxes to be paid. Please clarify. Thanks

    ReplyDelete
    Replies
    1. That's correct. If you own a principal residence, when you sell it or pass away, there is no capital gains tax payable on the increase in value of the property. If you own more than one property, make sure you understand which of them is your principal residence. Talk to an accountant or an estate planner.

      Lynne

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