Upon the first death, the property could pass tax deferred to the surviving spouse. On the second death, there would be a deemed disposition as if the property were sold at the then fair market value with capital gains tax payable accordingly. It may also be beneficial to mention that if the parents claimed depreciation (capital cost allowance), there would be a recapture (income inclusion and tax payable at regular tax rates) on this. This would apply if they sold it to him, transferred it to him, or on the second death.
Upon the first death, the property could pass, tax-deferred, to the surviving spouse. Upon the second death, there would be a deemed disposition as if the property were sold at the then fair market value with capital gains tax payable accordingly. If the parents claimed depreciation (capital cost allowance), there would be a recapture (income inclusion and tax payable at regular tax rates) on this. This would apply if they sold it to him, transferred it to him, or on the second death.
Watch: Capital gains tax, explained
What about estate taxes and probate fees?
Quite often, decisions around whether or not to bequeath property through an estate are clouded by an overwhelming desire to avoid probate tax.
In Canada, beneficiaries do not pay estate or inheritance tax. Instead, taxes are applied to the estate before it is distributed. Assets that pass through the estate are subject to probate fees or estate administration tax. These fees, often misinterpreted as taxes, are administered by the provincial courts. They pay for the standard court services that help verify and legally transfer a person’s estate to a chosen heir (and certain assets are exempt, such as property held as joint tenants or registered accounts with designated beneficiaries).
In the grand scheme of things, probate fees are relatively small. For instance, if your parents lived and died in Ontario, their estate would be charged probate fees of $0 on the first $50,000 of their estate, and $15 for every $1,000 above that. That would work out to $3,000 in estate administration fees for an estate worth $250,000—plus legal fees.
Other factors to consider
Probate fees aren’t the only factors to consider. When an entire estate is left to an heir the final tax bill can be quite significant. All unregistered assets in all accounts are considered to be sold at fair market value (FMV)—this is referred to as a deemed disposition—and the capital gains of the assets is then taxed. (The fair market value less the cost base.)
One option is to transfer ownership of the property to an heir before death. This means the deemed disposition of the property is taxed using the owners’ current capital gains marginal tax rate. The tax could range from 16% to 27% depending on the capital gain, depending on the amount of the capital gain and income. But if a property is inherited, the capital gain is part of the entire estate, which could mean a higher tax rate for the estate, if there are many assets to include.
How to determine fair market value
Your assumption is correct: The property’s FMV would be used to determine the capital gains tax owed, whether you decide to purchase the property or wait to inherit it.
The Canada Revenue Agency (CRA) defines FMV as “normally the highest price, expressed in dollars, that property would bring in an open and unrestricted market, between a willing buyer and a willing seller… who are acting independently of each other.”
