The problem with inheritance taxes is that you can die only once.
Better from the government’s point of view to have capital gains taxes where you can tax the same asset over and over. That being said, an inquisitive reader asked to see us address the situation where someone is willed real estate.
This is a question that comes up often. The good news for the most part is that the beneficiary doesn’t have to worry about the tax implications.
When someone dies, their financial gain on their principal residence is not taxable. This is the same for someone selling their house. Any profits from that sale are tax-free. However, if they have other real estate there can be tax implications.
The only time there isn’t is if there is a surviving spouse and they agree to deal with the gain at the time of their death. This way the tax implication can be deferred until the later passing.
Otherwise, the estate of the person who dies is responsible for making sure the taxes are paid. Some items are easy to calculate. A person buys a duplex as an investment for $100,000. At the time of their death it’s worth $150,000. The executor reports the $50,000 capital gain, of which half is taxable.
The beneficiary inherits the duplex with a cost base of $150,000. They subsequently sell it for $275,000 and their gain is $125,000 of which, once again, half is taxable.
The same thing happens in the case of investments. Someone holds stock in various companies. These securities are deemed to have been disposed of at the time of death and the capital gains or losses are accounted for.
I should mention that sometimes it takes awhile — years even — for an estate to settle. If there are holdings other than cash during this period, when the property is finally disposed of, whether to an heir or sold, the taxes on the gains from the time of death until the time of disposition are reported by the executor on a trust return.
In any event, by the time it reaches the beneficiary, all the taxes should have been paid and the recipient uses the current value that attracted the final tax calculation as their acquisition basis moving forward.
While this appears to be relatively clear, the problem arises when we talk about old family land. Capital gains taxes were established in 1972. The taxable gain is based on the growth since then until time of death.
Complicating things, during the early 1990s there was a period when you could make an election that established a new value for the holdings, while paying any taxes due then.
When there is a death, one should investigate to see if that is the case. Otherwise, you need to try and establish a beginning value for the property. Sometimes a real estate person can be helpful. They might have resources at their disposal that can show just what Uncle Elmer’s lot up north was worth 40 years ago.
On a completely different matter, the Canada Revenue Agency computers are being turned on this weekend for the new filing year. Anyone who has already filed can expect to see something from the government in a couple of weeks.
Next time, we’ll look at the process and volumes that they will be dealing with over the next couple of months.
Roger Haineault is with Tax Filers here in HRM. His column appears Saturday.
