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Kevin-Barry Henry

What Happens to the Principal Residence at Death in Canada?

By Kevin-Barry Henry, #1 Bestselling Author

Version Française

When a homeowner dies in Canada, all of their assets are deemed to have been sold at the same time, including the principal residence. The estate of the deceased then becomes the owner of the principal residence at the properties value on the day that person died. The deceased is entitled to use the capital gains exemption of the principal residence in Canada and therefore it is not taxed .

I will often get questions regarding the principal residence when it comes to estate planning and I thought we could go over some of the rules here in Canada, that might help us put smarter plans together.

Let’s try and tackle succession planning for your principal residence, go over the rules, and how they changed in 2016. We will look at how an executor can handle your real estate; we will answer a few questions about the principal residence exemptions and trusts; even protecting gifts toward a matrimonial home from divorce.

Capital gains on principal residence

Let’s look at the rules for the principal residence. As we have already seen, when an individual sells a principal residence, or is deemed to have sold it (like when you die, for example), the individual does not have to pay capital gains tax on the sale. Capital gains, once again, is simply the difference between what you sold your home for, and what you paid for it. That is the “gain”.

The rules for reporting the gain on your taxes did change recently however, as they were updated in the Government’s 2016 budget. The biggest change is that the Canada Revenue Agency (CRA) will now require taxpayers who sell their home to report it on their taxes so they may claim the principal residence exemption (PRE). In the past, Canadian homeowners did not have to report the sale to the CRA in order to claim the exemption. Individuals will have to report the sale on their tax return for the year in which they sold their home, beginning in 2016.

To get the exemption, you will need to report the proceeds of the sale, the date of acquisition (when you bought it) and a small description of the property on schedule 3 of your tax return.

If you decide not to report it, or forget, the CRA will have the right to charge you a penalty of $100 per month up to $8,000.

It is therefore important to make sure you report the sale to the CRA. If your retirement plan includes living of the proceeds of the sale of your principal residence, and you would like to enjoy those proceeds tax-free, you now know what you need to do. Or what your executor will need to do for you.

What does the executor need to do

The principal residence is still one of the largest and often is the largest asset in the estate, so it is important to know what CRA wants to see, so that you or your executor can make use of the tax-free proceeds.

Because, as we’ve already seen, real estate is a common component of many estate plans in Canada, your executor should know what they are getting themselves into. There are several obligations that come with caring for a home, and the executor will also have to keep on eye on the needs of the creditors and the beneficiaries.

Speaking of your old friend the executor, let’s look at how we can help them handle your real estate assets when the time comes.

Selling your investment accounts, your RRSPs, your RRIFs, your TFSAs or your non-registered accounts involve only a little time and signing a few forms to complete. Even your life insurance needs only a few certificates and signatures to produce the cheques. Real Estate is not that simple.

When you consider what is involved with caring for your own home, you will know well what to tell the executor in order to prepare them for what they are agreeing to. Things like mowing the lawn, arranging for the mail to be redirected, keeping insurance up to date, making sure the property taxes are paid, and any other general upkeep that your home currently requires of you. If you have to do it, your executor will have to also. And, they are not even the owner, nor do they stand to benefit, unless they are also beneficiaries.

There will be putting enormous responsibility on the shoulders of your executor, and they also must be accountable. When do they sell? The beneficiaries often want your money as soon as possible, but what if your home could get 10% more if it was sold in 6 months from now instead of today? Your creditors, if there are any, will certainly be interested in getting a better price for the asset and they have just as much interest in the property as your beneficiaries, so your executor needs to act in the best interest of both sides, which can be… prickly, at times.

To do their job properly, the executor will need to know what the value of the property is, and paying for one is the best way to get this information, so they can get the best possible price when they do sell. What happens if the beneficiary does not want to pay for a formal appraisal? The executor will need to get that in writing from the beneficiary, because the executor may have to defend their actions in front of judge someday, and if the sale of the asset yielded less than it could have for reasons that look like negligence, then your executor will want that paperwork to defend themselves and their actions.

The executor is a fiduciary, and must act in the best interest of all parties, not solely the beneficiaries, so expert advice is always recommended. Trying to wing it is never a good idea, when dealing with an estate, especially when the asset is real estate.

Here is a quick list of hazards and dangers your executor might encounter in dealing with your real estate. You should do your best to address these areas, and also ensure your instructions are clear to your executor. When you’re gone, they can’t prove what you said, they can only prove what you have in writing, so help them out:

Not getting an appraisal: As we just discussed, the executor needs to protect him or herself from both the beneficiaries and the creditors, and the lack of an appraisal can demonstrate the executor failed to fulfill the duty. So instruct them to get an appraisal.

Deciding to do more renovation work than is necessary: Sprucing the place up is a great idea, but if your executor decides to tear down the garage, put up a gazebo and install a basement bathroom, they need to be aware that if the sale of the property does not recoup those costs, they will likely be forced to foot the bill out of their own pocket. Be sure to instruct them wisely on the expected condition of the house when it is sold in your estate plan. If they get ambitious on their own, that is not your problem.

What about the equity in the principal residence?

A number of Canadians are now using the equity in their home to finance part of their lifestyle, whether they are retired or not. More than a third of Canadian retirees are expecting to use their home equity as a source of income in retirement according to a study by Toronto-based Fidelity Investments Canada ULC in 2016.

“That option tends to work well when clients choose to downsize their residence rather than using refinancing options. By spending less on their new home, clients can redirect part of the proceeds of the sale to their retirement investment portfolio” according Catherine Harris in an article she wrote for Investment Executive magazine.

There can be a downside to all this free money of course, and Canadian retirees should be wary of using home equity loans or reverse mortgages as a source of income in retirement. Kelly Trihey, a portfolio manager with Trihey Financial Group Inc. in Montreal agrees that caution must be exercised. “They’re effectively taking a loan that, in the worst-case scenario, could leave them without any place to live”. That is something to think about.

An example of this worst-case scenario would be if interest rates went up from their current historically low rates and your need for income could increase along with it as the interest on your home equity loan increases also. You may also find that as interest rates rise, the value of your home might stop climbing as it has the last 15 years or so, and possibly start to drop as it did in the 90s.

I’m not trying to say that reverse mortgages are bad idea. They certainly do have their place in Canadian estate planning, but they are not for everyone. I will write an article in the future that covers reverse-mortgages more thoroughly.

Home equity certainly needs to be part of any retirement plan, but there are several factors to consider when you and your advisor are making your income projections. Always be cautious.

Maybe your retirement plan is to bleed the equity you have in your principal residence to fund your hard-earned retirement and die on the day that your matches the value of the house. That’s certainly one way to look at it, and who am I to question your motives?  The thing is, if you happen to be healthy, and expect to live a long life, you may want to check the numbers. If the equity runs out, and the home is worth less than the debt, your lender will likely want to talk to you, and your estate plan will look a lot different.

Whatever you choose to do, it is important that you and your estate plan understand the principal residence rules so you can talk to your family, your beneficiaries and your executor to put together the best plan for you. You will be doing more than many Canadians.

With gratitude,

Kevin-Barry Henry.

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