If you’re selling an inherited property in Canada, it’s essential to understand such transactions’ rules and taxation laws. The question, “Is there an inheritance tax in Canada” is one you have probably considered if you intend to put your inherited property up for sale.
Even though each province handles these types of transactions differently, here are some important things to know about inheritance tax in Canada.
Is There an Inheritance Tax in Canada?
In most cases, inherited property held for more than one year qualifies for a reduced inclusion rate of 50% on any profit made by the recipient.
Additionally, only half the capital gain will be taxable if you inherit real estates such as land or buildings. The condition applies to both principal residences and other properties.
Only one-half of the capital gain qualifies for the 50% inclusion rate when selling vacant land or buildings. You have up to 4 years from the date of death to claim any capital gains tax owing. This is an extension on top of the typical reassessment period.
In the case of RRSPs or RRIFs, keep in mind that this is not considered income and therefore cannot be subject to capital gains tax. However, the transfer of funds into your RRSP will count as an over-contribution if you are already retired and have no earned income.
In this scenario, only 50% of the RRSPs are tax-deductible. If you’re inheriting an insurance policy, the proceeds are not taxed as long as the money is used to pay for funeral costs or other related expenses, such as paying outstanding debts or estate administration.
Below are the steps involved in listing and selling an inherited property in Canada.
Authorize a Trust Manager or Other Authority
To sell an inherited home in Canada, you’ll need to find a family representative. This person will have the authority to sign off on any transactions and distribute the sale proceeds among beneficiaries or estate creditors.
List the Property in the Market
Once everyone agrees, list the property with a reputable realtor. There should be no capital gains tax owing at this time. A realtor can advise you on the necessary documentation and forms for this type of transaction.
Submit Relevant Documents
If no capital gains tax is due at the time of sale, the realtor can assist you in submitting a “no gain/no loss” application with CRA to ensure that the total purchase price qualifies for the 50% inclusion rate.
For instance, if your family member bought a house for $100k and it was worth $250k at the time of death, you would only pay capital gains tax on the $150k difference. Your real estate agent or legal consultant can educate you on similar aspects.
Assess your home’s value and expected real estate profits to know how much CGT you will likely pay. Expert real estate agents can help craft investment structuring strategies to carry out the sale in the most tax-efficient manner.
In summary, if you’re selling an inherited property in Canada, make sure to work with a realtor who has experience dealing with these types of transactions and follows all applicable rules and procedures.