Politics

Do Ottawa's proposed capital gains tax changes affect inherited properties?

Tax experts and lawyers explain to CBC how capital gains works on property transfers, including what happens with inheritances and how the value of those properties is determined.

Tax experts, lawyers explain what you should consider in light of pending tax hike

Breaking down the capital gains tax changes

29 days ago
Duration 4:49
The federal government unveiled billions in spending in its 2024 budget, and to help pay for it all, it’s proposing changes to how capital gains are taxed. CBC’s Nisha Patel breaks down how it works and who will be affected.

The federal government's budget proposal to increase the inclusion rate for the capital gains tax for people whose profits go past a certain threshold has drawn mixed reactions from experts, entrepreneurs and taxpayers.

One asset affected by these changes is real estate, including cottages and investment homes.

The change proposed in the Trudeau government's new budget would raise the inclusion rate to 67 per cent on capital gains above $250,000 for individuals.

So for the first $250,000 in capital gains, an individual taxpayer would continue to pay tax on 50 per cent of the asset's gain. For every dollar beyond $250,000, two-thirds would be taxable.

So what does this mean for someone who inherits a home and considers selling it?

A red single-family home stands in a row of houses.
Homes in the Kitsilano neighbourhood of Vancouver on October 3, 2022. (Jonathan Hayward/The Canadian Press)

CBC News asked tax experts and lawyers to explain.

I'm inheriting my parents' house. Am I affected?

If your parents are leaving you the home they live in, and it's the only property they own, it will be exempt from the capital gains tax when it transfers to you.

The 2024 budget maintains a capital gains exemption for people selling their primary home.

Mark Weisleder, a senior partner at Real Estate Lawyers.ca LLP, said that when people pass away, some of their assets are considered "sold" on their date of death.

In this scenario, your parents' primary home is being "sold" to you as the beneficiary, meaning there are no capital gains because of the exemption. But other tax consequences might apply.

An aeriel photo of homes in a neighbourhood
Houses and mobile homes in a residential neighbourhood of Kamloops, B.C. on Sept. 11, 2023. (Darryl Dyck/The Canadian Press)

Weisleder said he's "delighted" the federal government did not change the primary home exemption because, "for many Canadians, that's their retirement plan."

"They buy a home, they live in it for 30 years tax-free. That's their retirement when they sell it," Weisleder said.

But if your parents own an investment property or vacation house that is not their primary home, the "sale" that occurs when they die will include taxable capital gains if the property has accrued value.

"Those taxes are frankly the responsibility of the estate to pay, and then the person just takes over the asset. And they won't have that liability themselves," Weisleder said.

Finally, if you sell your parents' primary residence after inheriting it, there will be a taxable capital gain on the sale if it makes a profit.

What happens if the property has jumped in value?

If you inherit your parents' primary residence, the value of that property is assessed at the time you receive it.

"You get the property at the fair market value at the date of transfer, so the date of death," said Jason Rosen, founding partner at Rosen & Associates Tax Law.

Say your parents purchased their house decades ago for $50,000. You inherit the property when the fair market value is $500,000.

A man knocks on a door while a sold sign hands outside.
A realtor's sign stands outside a house in Toronto on May 20, 2021. (Chris Helgren/Reuters)

If you sell the property for $600,000 a few years later, the increase in the value of the asset for you is $100,000 — not the $450,000 increase in value since the time your parents purchased the residence.

"The cost base is what you 'bought' the property at, or in this case inherited the property," Rosen said.

Are there other exemptions in the budget?

The 2024 budget proposes to raise the lifetime capital gains exemption on the sale of small business shares, farming and fishing property to $1.25 million. That figure would be indexed to inflation thereafter.

To encourage entrepreneurship, the federal government is also proposing a Canadian Entrepreneurs' Incentive, which would reduce the inclusion rate to 33.3 per cent on a lifetime maximum of $2 million in eligible capital gains.

When the incentive is fully rolled out, the federal government claims entrepreneurs will have a combined capital gains exemption of $3.25 million when selling all or part of their business.

What advice do the experts have?

Rosen said taxpayers who are wondering what to do with properties should seek professional assistance.

"If you don't know, it's better to ask questions now than regret not asking them later," he said.

If adopted, the capital gains tax changes will go into effect on June 25.

"I think the best thing to do is just to evaluate your assets and your net worth and determine if this is going to impact you," Rosen said. "If it's going to be a negative impact, consider your options and seek advice."

ABOUT THE AUTHOR

Benjamin Lopez Steven is a reporter and part-time writer for CBC News Network. He's also a recent journalism graduate from Carleton University. You can reach him at benjamin.steven@cbc.ca or find him on Twitter at @bensteven_s.