What are the tax consequences of real estate joint ownership when one owner dies?


A MoneySense reader writes:

My wife and her mother own a Toronto condo as joint tenants. My mother-in-law lives in the condo as her principal residence, while my wife is currently a non-resident Canadian living overseas.

When my mother-in-law passes away, my understanding is that her share of the condo will be transferred to my wife as the other owner. We also think that my mother-in-law’s estate will not owe any capital gains taxes because the condo is my mother-in-law’s principal residence.

What I’m wondering about is whether there would be any tax consequences for my wife when my mother-in-law passes away and my wife inherits her share of the condo. Would there be any tax owing for my wife?

FPAC responds:

Great question! We’ll go over all of the issues you raise in this response.

Understanding different types of joint ownership

There are two different kinds of joint ownership that can apply when you own a property with someone else:

  • Jointly, with rights of survivorship: In this case, when either property owner dies, their share passes directly to the other owner. It doesn’t go through the other owner’s estate first. That means estate administration (probate) fees won’t be due on the property as part of settling her estate.
  • Tenants in common: With this form of ownership, each owner says, in their own will, who will inherit ownership of their portion of the property. If this is the form of ownership your wife and mother-in-law have, probate fees would be payable on your mother-in-law’s share of the condo upon her death. That’s because what she wants to happen to her ownership share is addressed in her will.

Will your mother-in-law owe any taxes on the condo when she dies?

From what you’ve written, your wife seems to own the property with her mother in the first type of joint ownership—jointly, with rights of survivorship.

If this is accurate, there won’t be any probate fees payable on the condo when your mother-in-law passes away. Because the condo is her principal residence, she wouldn’t owe any capital gains taxes on the condo, either.

Instead, the property should pass free and clear to your wife with no probate or income tax owing by your mother-in-law or her estate. 

Will your wife owe any taxes on the condo when your mother-in-law dies?

This is where answering your question gets a bit tricky!

I’m not sure where your wife resides, but the tax rules of that particular country will likely come into play if and when your wife sells the condo. In addition, there will likely also be tax consequences in Canada.

There are three factors that could impact whether and how much tax your wife might pay on the condo, if she sells it or otherwise disposes of it:

  • Keeping the condo or not: The first is whether your wife continues to own the condo after her mother passes away, or whether she sells it. Keep in mind that if your wife has not lived in the condo as her principal residence, she may owe capital gains tax on her share of the condo starting from when it was first purchased, and then on the full condo after her mother passes away.
  • Renting out the condo or not: If your wife keeps the condo, the second factor is whether it’s used as a rental property.
  • Living in Canada or abroad: The third factor is where your wife is living when the condo is sold, whether that’s when your mother-in-law passes away, or sometime afterwards.

For example, let’s say that after your mother-in-law passes away, your wife keeps the condo—which she now owns 100%—and sells it sometime later. In that case, when she sells the condo she might face the following tax consequences:

  • Non-resident tax in Canada; or
  • Capital gains tax in Canada, and
  • Tax consequences in her country of residence upon sale.

If she does not keep the condo after her mother dies, or if she keeps it and rents it, the tax picture could look different again.

As you can see, the choices your wife makes about the condo after your mother-in-law’s death can have complex tax consequences, so it will be important to get the right advice from a qualified tax professional at the time of sale—or even before, so you can be prepared for the likely outcomes in her case.

This response was provided by FPAC Member Andrea Thompson, CFP®, CRPC (US), CLU, CHS, CDFA, a Senior Financial Planner, Coleman Wealth at Raymond James Ltd. in Toronto. Information provided is not a solicitation and although obtained from sources considered reliable, is not guaranteed. The view and opinions contained in the article are those of the author, not Raymond James Ltd. Raymond James Ltd. member of Canadian Investor Protection Fund.

Andrea focuses on working with clients to create long-term, holistic planning solutions that integrate all aspects of their financial lives, including cross-border (US/CAN) and domestic retirement, education and estate planning, risk management, philanthropic strategies, taxation, cash flow and debt management strategies.

Qualified Advice is written by members of FPAC (Financial Planning Association of Canada), a MoneySense content partner. The association’s goal is to set standards and principles that will allow financial planning to evolve into a knowledge-based profession that ultimately commands the credibility, public awareness and respect of other respected advisory professions, working closely with governments, regulators, financial planners, academia, vendors and the general public.

 

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