Question:
If you inherit a house from parents in Canada through a Will, how is it taxed as a primary residence? What are the pros & cons of putting it in a trust?
Answer:
There are no longer any estate taxes, inheritance taxes, succession duties, death duties, or gift taxes. They were all abolished on 31 December 1971.
They were all replaced by capital gains taxes effective 1 January 1972. In addition, there were Income taxes and now the HST which may have implications.
By primary residence, I believe you mean “principal residence”. If that were the case for all of the years since 1971, then there would be no taxation arising from capital gains tax. It would be exempt.
Since the transfer to the child took place in a Will, then, there would be what is often referred to as Probate Fees (actually, the Estate Administration Tax). This runs at 1.5% of the value of the asset (0.5% on the first $50,000.00). This would be dependent upon the location of the property. It applies in Ontario, but not necessarily in other Provinces.
Placing the property into an inter vivos trust can be problematic. There is a deemed disposition every 21 years, meaning that the gain has to be calculated, reported and taxes paid. Trusts are taxed at the highest marginal rate. Hence, most of the time, this is not an effective tax deferral strategy. There used to be a preferred taxation for testamentary trusts, but that was removed 1 January 2016. Since that time neither trust arrangements are effective.
Brian Madigan LL.B., Broker