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First off, my condolences to you and your family.

There are very complicated tax implications that can arise when you inherit property.

1) Inherited a Primary Residence

Let’s take a closer look at the tax implications of the capital gains on the property.

- If they paid 200K for that house and it's now worth 500K, that entire amount is tax exempt. Now, you must decide what you are going to do with this property?

-What most folks decide to do is a deemed disposition on death. A deemed disposition on death means that it is deemed to have been sold. Since the property is deemed to have been sold, it will form part of their estate.

-You'll most likely want to cache that portion out of your estate and if that's the case, you’ll need to put the property for sale and pay the fees, the commissions, etc.

- The great news is that it's going to be mostly tax free - exclusively tax free if it's their primary residence.

2) Inherited farmland

Let’s say your Great Aunt Gertrude left farmlands to you. Now you'll need to look at a few things. When did they buy the farm? Who's been farming it? How long have they been farming it? What's the relationship to you with respect to farming?

-The Canadian government allows a onetime lifetime capital gains exemption on qualified farmland.

- If your land is qualified farmland, $1 million is the maximum exemption. Whether or not your land is qualified is a bit of a complicated test and it’s an entire other topic, but just know that you can potentially qualify for that based on a whole set of factors.

- You exempt that million bucks in taxes on the capital gains. Now, the neat thing about a sale of farmland and a sale of any asset at a higher value sometime in the future, the capital gains tax is usually less than it would be on interest income.

- It's taxed at about half the rate.

- In this scenario, you got farm land that you inherited, and it was owned either personally or it was owned in a corp.

-You're going to have to look at whether you're getting the capital gains exemption or not. If not, this will be a deemed disposition.
You're going to have to pay the tax on the difference of the value that they paid for the farm land versus what it's worth today.

- If it did qualify for capital gains exemption or a portion of it, that’s great news. You're exempting for that portion with respect to the capital gains exemption.

- Make sure you are aware of the following information:

-Even though Great Aunt Gertrude might have gotten her capital gains exemption in the eighties, nineties or early 2000s when she sold her last piece of property of the respective farmland, there’s the possibility of a top up that now that exists because the government has moved the number over time from 500K to 750K to now 1 million dollars.

3) Inherited a Cottage

We often find out that people bought these cottages a generation ago. The cottage might’ve been purchased for 50K in the 60s and it’s now worth a couple million dollars. Unfortunately, that is a complete capital gain that the estate will need to pay.

In a situation where mom and dad didn't have tax planning in place and didn't have insurance in place, that becomes a significant tax bill that needs to be paid by the estate.

If there's no insurance, then you and your siblings have a couple of choices.

-You can either buy out a potential half and pay the tax bill through a mortgage and you could do that through a bank.

- You could cut a check for the tax from the estate with other assets.

- If there are no other assets, you're going to need to put a mortgage on that property.

- Other option we see sometimes is just a straight sale of the cottage. The cottage gets sold, the tax gets paid, and the proceeds get distributed amongst the beneficiaries.

4) Inherited a Rental or Commercial Property

-The rental or commercial property is either going to be owned personally or it's going to be owned in a Corp.

- Whenever you are inheriting a rental property or a commercial property, the tax advantage is that you can depreciate the value of that respective property as an owner.


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