The Best Way to Leave Property to Kids Tax-Free
If you’re hoping to pass your home or other property to your children in the future, you need to be mindful of capital gains tax when inheriting property in Canada. Luckily, the right planning can make sure you pass down your home without having your children face large tax liabilities. Here's a simple guide to how it works and the smartest ways to keep inherited property tax-free.
What Happens to Property When Someone Passes Away?
First, let’s go over the basics.
Canada has no inheritance tax, so your children won’t be taxed for simply inheriting something. Any taxes are handled in the parent’s final tax return, and will not have to be paid by the kids.
The government treats your property as if it was all sold right before death at “fair market value”, regardless of if you actually did sell it or intended to. This is important, as this is where capital gains tax will take effect.
The way the property is taxed depends on whether it was your primary residence or a secondary property. Your primary residence may qualify as tax-exempt due to Principal Residence Exemption (PRE). Secondary properties, however, are subject to capital gains tax.
Capital Gains Tax
Capital gains tax is applied to a property when the value of said property increases from the time you bought it to the time it was sold (the government would consider it “sold” shortly before death). In Canada, 50% of the capital gain is taxable.
To put this into perspective, let’s say you bought a property for $150,000. Once you pass away, the market value of that property is now at $350,000. That is a capital gain of $200,000. Again, 50% of this gain is taxable, and depending on your tax bracket, you could pay anywhere from $30,000 to $100,000 in capital gains tax.
What If a Spouse Inherits the Property?
If your spouse or common-law partner inherits the property, taxes will usually be deferred, meaning they don’t have to pay capital gains immediately. In fact, they’ll only need to pay the taxes if they sell the property or pass away.
However, this deferral doesn’t apply when leaving property to your children.
How to Leave Property Tax-Efficiently
Here are the top strategies to pass property to your kids with as little tax as possible (legally, of course):
Leave Property Through a Will or Trust
Ensure your will states the specific assets you are leaving behind and who you wish to inherit them upon your death. List the recipients (your children) and specify what they will receive. Follow proper protocol for appointing an executor and drafting the will to ensure the terms of your will aren’t varied by the court.
You can also set up a trust, which is a legal way to manage and distribute your property:
A testamentary trust allows a trustee to hold the property for your children without transferring it to them immediately. This will delay capital gains and allow you to sell during a low-income year (where the capital gains tax won’t be as high) or when market conditions are more favourable.
If the property is a rental which regularly earns income, the testamentary trust may allow income splitting between multiple beneficiaries. This will reduce the tax, as long as the beneficiaries are in a lower tax bracket and the trust distributes the income strategically.
Use the Principal Residence Exemption (PRE)
If you’re passing on your principal residence, you can save your family from capital gains tax entirely. To qualify for the Principal Residence Exemption (PRE), the property must be your principal residence (where you mainly lived before death). You can only claim one principal residence, so additional properties will not qualify for PRE.
Talk to a Tax Planning Expert Before You Pass on Property
To ensure a tax-efficient inheritance for your children, we highly recommend talking to one of our professional tax planners. We specialize in creating personalized, easy-to-follow tax strategies to help you pay as little taxes as possible while following Canadian tax law and regulations. This doesn’t just apply to capital gains tax, but the amount you pay on your yearly tax returns.
Our qualified tax planners can help you:
Avoid or reduce capital gains tax
Structure your estate for maximum efficiency
Create a will or trust that protects your children from tax burdens
Ensure your property is passed on exactly as you intended
Don’t leave your legacy to chance — Contact us today for personalized tax advice.