Ask John Scholl... What about Mom's house?

One of my clients, Jeremy, phoned me and as usual was concerned about a potential tax liability.

He is married with 2 kids and has a house in Toronto. His father recently passed away, and his mother Bernadette, is getting on in age. She has lived in their principal residence under joint ownership in Vancouver for well over 15 years and does not rent out any part of it. She and her husband bought the house for $225,000 and it is now worth over $500,000.

His concern was that when Bernadette passes away, how much tax would be payable on increased value of the Vancouver house and who would have to pay for it. Bernadette updated the will leaving the house in Vancouver to Jeremy. Initially, he was thrilled because it is a beautiful home that he always envisioned he could use as a vacation property. He and his family have visited his parents every year for short vacations and have always been impressed with its upkeep and surroundings. Then he got worried… will he be nailed for capital gains when she dies? Will her final tax bill reflect the growth and have no cash available to pay all the tax? Should he convince his mother to put his name on the deed now to reduce the impact?

This has caused Jeremy and his wife, when he told her of his concerns, a lot of stress as he really didn’t have a lot of spare cash and to cash in RRSPs to pay the cap gains tax bill would also incur tax on his behalf because withdrawals from RRSPs are 100% taxable at his marginal tax rate.

I managed to relieve their stress dramatically. Here is what will happen.

Normally when you are the final survivor in a marriage/common law relationship, upon your death, you are deemed to have disposed of your assets at Fair Market Value. This would be shown on your final tax bill and taxed to the deceased accordingly. The asset then would pass to your estate at that Fair Market Value and dispersed according to the will. The executors role is to ensure the final tax bill is paid.

There are a lot of exceptions…..e.g.: if spouse was alive under joint ownership, then the asset passes to the surviving spouse outside of the will (no probate).

For principal residences in Canada, growth is not taxable, so when Bernadette passes away, the house and property would pass to the estate at Fair Market Value and no tax from its growth in value is payable on Bernadette’s final return.

Jeremy however, should ensure a fair market value assessment is done on BOTH his own Toronto property and Bernadette’s Vancouver property shortly after her death because he already has a principal residence and any growth from here on is a capital gain.

If Jeremy shortly after were to sell his mothers property, no capital gains would be incurred.

If Jeremy shortly after were to sell his Toronto property and move to Vancouver, there would be no capital gain on this either (Principal residence exemption on Toronto property).

If Jeremy were to keep both properties, live in one and visit the other property at least once a year (CRA does not define a lower limit to number of days/year you must live in a property to call it a principal residence), but not rent it out, then, at the time he sells one of the properties, he can determine which residence he wishes to treat as principal residence. He would choose as his principal residence the one that grew the most (tax free principal residence exemption), but the principal residence election can be split year by year for the two properties. Suppose he keeps both properties for 10 years. Growth in value of the Toronto property for 6 of the years was greater than the Vancouver property , but in the other 4 years Vancouver prices took off. Then, he could choose principal residence exemption for the Toronto property for 6 of the years and the Vancouver property for 4 years to maximize that capital gains savings.

The worst option Jeremy would be to have his mother add him as joint owner on the Vancouver property. They would have to get a fair market value assessment done for the date of sale (because that’s what it is). There would be no capital gains on the 50% sale to his mother because it was her principal residence, but what does it do for Jeremy. He would immediately start to accrue capital gains on the Vancouver home from the date of the registration as joint owner because it is his second property. Eventually, when he sold the Vancouver home, he would owe capital gains tax on the growth of the home from the date of joint ownership instead of having the options above from the date of his mother’s death.

Jeremy, was just so relieved that he had options and wouldn’t have to sell his mother’s legacy to pay a tax bill.

John Scholl , CLU (Chartered Life Underwriter),CGA, B. Mathematics,

Financial Consultant - Investors Group Financial Services Inc.

& Investors Group Insurances Services Inc.

Wealth Management & Financial Planning

Phone: (905) 450-2891 X529 Toll Free: 1 (866) 799-2223 x529 Cell (416) 731-3660 Fax: (905) 450-9747

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