Today’s blog was written by Jessica Butler, Law Clerk at Fasken LLP.

Many Canadians hold a large share of their wealth in personally-owned real estate and consider it to be a critical part of their wealth-building strategy. Donald Sutherland, the well known Canadian actor who passed away in June of this year, is purported to have had a multimillion dollar real estate portfolio at the time of his death.

For those Canadians who don’t command the resources of a Golden Globe winner, real estate ownership is often limited to their principal residence. With the low-interest rate environment of the previous decade, it seems more and more Canadians have purchased recreational and investment properties as well.

Recent changes to the capital gains inclusion rate have many Canadians considering the tax consequences of holding real property at the time of their death. Today’s blog will provide an overview of these consequences, and should serve as a reminder that careful thought should be given to the treatment of real estate holdings in a well-considered estate plan.

Tax Considerations Upon Death

Death brings significant tax considerations for real estate assets. In Ontario, there are generally two kinds of taxes to consider on death as they relate to real estate: estate administration tax and capital gains tax.

Estate Administration Tax

In Ontario, in the event that your real property is subject to probate (i.e. it is not held in a trust, there is no right of survivorship, it is not eligible for a “first dealings” exemption to probate, and it is not legally owned by a corporation governed by a secondary will), then estate administration tax (“probate fees”) on the fair market value of the real property is owed to the Minister of Finance at a rate of approximately 1.5% of the value of assets in excess of $50,000. Note that probate fees are not payable on real property situate outside of Ontario, and that for real property situate in Ontario, the value of any mortgage registered on title to the real property may be deducted from the total value of assets included for the purpose of calculating probate fees.

By way of example, for real property valued at $700,000, with a mortgage registered on title with an outstanding principal amount of $200,000, the estate administration tax would be $6,750 (1.5% of the net value of the home of $500,000 in excess of the $50,000 threshold), and for real property valued at $2.0 million with a mortgage registered on title with an outstanding principal amount of $500,000, the estate administration tax owing would be $21,750 (1.5% of the net value of the home of $500,000 in excess of the $50,000 threshold). (Note that these examples do not take into consideration any other assets in the estate that are subject to probate).

Capital Gains Tax

On death, pursuant to s70(5) of the Income Tax Act,[1] an individual is deemed to have disposed of, and immediately reacquired, their real property immediately before death at fair market value. Upon the disposal of real property which does not qualify as a principal residence (discussed further below), income tax is payable on any amount by which the fair market value of the real property exceeds the cost base of the property (generally the purchase price plus the cost of any capital improvements to the property, though I note that full discussion of the calculation of capital gains for real property is beyond the scope of today’s blog). In any given year (including in the year of death), for an individual, 50% of the first $250,000 in total realized capital gains, inclusive of real property, is taxable, and 66.67% of any gains in excess of $250,000 is taxable.

There is a notable exception to this rule: an individual may designate one property each year as their “principal residence”. The capital gain on the disposal of a principal residence is not included in a person’s income for the year of disposal – meaning, no tax is payable on the gain. However, there are limits to the principal residence exemption. Only one property can be designated as the principal residence. Where an individual owns more than one piece of real property, they should obtain proper advice to determine which property should be designated as the principal residence. It is also important to note that spouses[2] can only claim one principal residence between them, meaning one spouse cannot claim the matrimonial home as their principal residence, while the other spouse claims the family cottage as their principal residence.

One other note about spouses – real property that is left on death to a spouse,²  either outright or in a qualifying spousal trust, will qualify for a “spousal rollover” under s70(6) of the Income Tax Act. Capital gains tax will not be payable until the surviving spouse disposes of the asset or passes away.

The Importance of Estate Planning in Wealth Preservation

In the complex landscape of real estate and estate planning, Canadians need to navigate carefully to protect their wealth and ensure their legacy. Whether you’re a renowned actor with a vast portfolio or a homeowner with a single property, you should consider utilizing the expertise of professional advisors to ensure a tax-efficient transfer of these assets following death. There are strategies that may be used to minimize (and defer, in the case of capital gains) the taxes payable on real property at death.

As a reminder, the contents of this blog are not intended to be legal advice and one should consider their own circumstances and seek advice from their respective advisors.

Thanks for reading!

[1] R.S.C., 1985, c.1 (5^th Supp.)

[2] As such term is defined in the Income Tax Act.