Updated: Mar 5, 2022
I had some misconceptions in my previous BLOG about disposing real estate in estate plans and had friends asking me questions after my post I couldn’t answer. This caused me to read up more on the subject and I learned a quite a bit more since. As a result of what I had learned I felt a need to edit my last post a little to remove some nonfactual information, and thought I would ink another BLOG just to cover this topic in a little more depth.
Putting careful thought into your estate plans with regards to your home disposal can significantly reduce the stress on your executor, your family, and any co-owners if applicable. And, there are many situations that can exist and need to be considered independently. Again, I have to mention I’m no expert and am learning a lot of this as I continue to write about it. My BLOG helps me learn and plan for my own benefit as a DIY investor and retiree. You are best to look into your own specific situations and seek professional council where needed.
As I mentioned before, there is no inheritance tax in Canada. All this means is anyone inheriting money or assets from a deceased person will not pay tax on the value of those assets at the time of death. When a person dies, there is a deemed disposition of their assets. What this means is any property or investments are considered to be sold when a person dies, whether they are or not. The value of these assets are reported as income in the year of death and the final tax bill is assessed accordingly. There very well may be capital gains taxes (50%) to apply to any gains in these asset values. There may be a mix of losses and gains, but at any rate, the point is they are all virtually sold and the taxes assessed at time of death.
The only exception to the capital gains rule is a home if it is your principal residence. If you die with a house, and have lived in it more than 3 years, it will be considered your principal residence and will be exempt from capital gains tax as if you were living and sold it. But be careful, if heirs hang onto that house for a time and it appreciates significantly, such that we have seen recently in the Toronto, Vancouver, and Okanagan real estate markets, then capital gains will kick in again if sold. What happens is the FMV (fair market value) at time of death is subtracted from the higher sale price and capital gains are applied. Typically a Will would say that a home is sold, and distributed apportionately amongst heirs.
In the case of secondary properties, like a cottage or vacation home, they do not qualify for capital gains tax exemption and will be subject to the capital gains tax. The good, amd or bad news, is there is no way to avoid this, much like if there are investments to dispose of they will get hit with 50% capital gains taxes as well.
But all this can be more complex. In a vast majority of cases Seniors will share homes with family members. They may own an equal portion, for example half to the husband and half to the wife. Or they may be in arrangements where they share in a home with another person or family member, making each of them own 1/3. These are called joint tenancy arrangements, and by law if any one of the joint tenants pass away, their value goes evenly to the remaining tenants. This fact alone should be understood by joint tenants, as you cannot will your portion of value to anyone else. These splits should be stated on the title document.
There is another joint arrangement called common tenancy, in which people involved may own different percentages and different interests in a home. One person may own 50%, another 30%, and yet another 20%. Under these arrangements if one of the co-tenants dies, they can will their value to anyone. The people in a common tenancy agreement do not hold any entitlement to the deceased person’s interest by law.
Without getting into the weeds, there are quite a few other complexities and situations that enter into the mix of these two different agreement. If the ownership or title document does not state the nature of ownership, and you all thought you had a joint tenancy agreement, it will default to the common tenancy agreement by BC law. This could change the estate settlement outcome you may have wanted after probate is completed.
There is also requirement with Joint Tenancy agreements called the “four unities”.The four unities are:
Unity of title – property transfer happens under the same legal instrument;
Unity of interest – interest of each joint tenant must be identical in nature, extent, and duration;
Unity of possession – each joint tenant has an undivided possession of the whole property; and
Unity of time – the interest of each must vest (meaning to take effect) at the same time.
If any one of these unities is broken, the agreement again defaults to joint tenancy. This becomes important to understand, because a joint tenant can sever the agreement and revert it to common tenancy without the other tenants knowing about it. All they need to do is break one of the unities, for example, transferring a portion of their ownership to someone else.
In joint agreements there are legal considerations made towards whether you have beneficial interest, legal interest, or both. Beneficial interest is when you own real or true ownership, such as in the case of “you paid” for the property. Legal interest is simply when you are a title holder, such as in the case you’ve taken over the title to assist in managimg the true owner’s affairs, but do not hold right to use the property how you want to.
The gist of all this is, is when joint agreements are set up, it needs to be understood the intent and expectations of all the owners, and these agreements need to be set up properly to avoid legal roadblocks and unexpected results during probate of a deceased person’s will.
Here are some links that better explain all this, and a cool checklist for estate planning.