One of the most challenging decisions that some parents have to make when drafting their wills is how to pass their vacation property to their children.
The first decision is who to leave the property to. This alone can be very difficult. Do they leave it to all of their children to share or do they leave it to only one.
Once this decision is made the tax implications have to be considered. On the death of the first of the parents the property can be left to the surviving spouse and no capital gains tax will be payable. On the death of the second parent the capital gains tax will be paid by the estate. There will also be probate fees of approximately 1.4% payable by the estate.
For example, if a parent has 3 children, an estate worth $2,000,000 and a vacation property worth $1,000,000 they may choose to leave the vacation property to one child and the remainder of the estate to their other 2 children equally thinking it is a fair division of the assets.
This will not be the case particularly if the vacation property has increased in value and there is a significant amount of capital gains tax owing. The one child will receive the $1,000,000 property and the other two children will receive one half of the estate after all taxes and probate fees have been paid.
FAQ
1) What is Capital Gains Tax?
Capital Gains Tax is a tax you pay on the profit you make from selling an asset, like property, that has increased in value since you purchased it.
2) How much Capital Gains Tax is payable?
For individuals in Canada, capital gains tax is payable on one-half of the first $250,000. As of June 2024, the rate increases to two-thirds for any gains exceeding $250,000. You’ll pay tax at your marginal rate which depends on your income and province of residence.
3) What if the property is my Principal Residence?
If the property is your principal residence, you should be exempt from paying capital gains tax as long as you lived there for every year you owned it.
4) What happens on my death?
There is a deemed disposition of property on a person’s death, meaning the CRA treats all capital property (real estate, investments, etc.) as if it were sold at fair market value on the date of death. So, if you own property that is not your principal residence, your estate will pay the capital gains tax that is triggered on your death.
For more information and to book an appointment to discuss your estate plan, please contact Deborah Todd Law at 250-590-6226 or use our contact page.
Deborah A. Todd
